Description
The renaissance in United States oil and gas production reaffirms the timeless tribute Mr. Tait made to the nation's petroleum entrepreneurs almost 70 years ago. The tools have changed a lot but the pioneer spirit has not. Boundless entrepreneurial energy and an increasingly sophisticated, high-tech string of tools has created a genuine opportunity for the United States to become a net energy exporter instead of a net energy importer.
T H E C E N T E R F O R
APPLIED ECONOMICS
Technical Report 12-1116
November 2012
SCHOOL OF
BUSINESS
The University of Kansas
Supporting Regional Economic Development through Analysis and Education
THE KANSAS OIL AND GAS INDUSTRY:
AN ENDURING MODEL
OF HIGH-TECH ENTREPRENEURSHIP
Arthur P. Hall
Executive Director
Center for Applied Economics
University of Kansas
School of Business
About The Center for Applied Economics
The KU School of Business established the Center for Applied Economics in February of 2004. The mission of
the Center for Applied Economics is to help advance the economic development of the state and region by offering
economic analysis and economic education relevant for policy makers, community leaders, and other interested citi-
zens. The stakeholders in the Center want to increase the amount of credible economic analysis available to decision
makers in both the state and region. When policy makers, community leaders, and citizens discuss issues that may
have an impact on the economic development potential of the state or region, they can beneft from a wide array of
perspectives. The Center focuses on the contributions that markets and economic institutions can make to economic
development. Because credibility is, in part, a function of economic literacy, the Center also promotes economics
education.
About the Author
Arthur P. Hall is the founding Executive Director of the Center for Applied Economics at the University of Kansas
School of Business. Before joining the KU School of Business, Hall was Chief Economist in the Public Affairs group
of Wichita, KS-based Koch Industries, Inc. In that capacity, he worked with business leaders to defne how public
policy initiatives would infuence the structure of the markets in which the company participates. Koch sponsored
Hall’s directorship of Kansas Governor Sebelius’ Budget Effciency Savings Teams from April 2003 until his depar-
ture from the frm in February 2004.
Before joining Koch Industries in May 1997, Hall was Senior Economist at the Washington, D.C.-based Tax Founda-
tion, where he produced quantitative and qualitative research pertaining to the economics of taxation and acted as
an economic advisor to The National Commission on Economic Growth and Tax Reform. Before that, he worked
as a fnancial economist at the U.S. General Accounting Offce. Hall has taught university-level economics at both
the undergraduate and MBA level. He received his doctorate in economics from the University of Georgia and his
bachelor of arts in economics from Emory University.
The opinions expressed are those of the author; they should in no way be interpreted as the viewpoints of the
University of Kansas (or any subunits thereof) or the Kansas Board of Regents.
The Center for Applied Economics gratefully acknowledges fnancial support from the Kansas Oil and Gas Resource
Fund.
i
Table of Contents
The Kansas Oil and Gas Industry: An Enduring Model of High-Tech Entrepreneurship ..........1
Visualizing the Model of High-Tech Entrepreneurship ...............................................................4
Understanding Global Price-Setting Mechanisms in the Context of
Integrated Global Markets ...............................................................................................................12
Trends in the Global Consumption and Production of Oil ............................................14
Details Related to Oil Supply ................................................................................................17
Physical Markets and Paper Markets: Prelude to Discussion of Oil Demand ..............19
Details Related to Oil Demand ............................................................................................23
Environmental Regulations: An Explanation of the Price Spike of 2006-2008 .........24
The Co-Movement of Oil and Natural Gas Prices ...........................................................27
Entrepreneurial Cost Control through the Business of Science and Engineering .................30
The Technology of the Upstream Sector ...........................................................................31
The Business of the Upstream Sector .................................................................................35
Site Preparation, Well Drilling, and Well Completion .......................................................37
Health, Safety, and Environmental Oversight ....................................................................39
Assessing the Future: How “Unconventional” Oil and Gas Plays May
Contribute to the Kansas Economy ..............................................................................................41
The Mississippian Lime Play .................................................................................................41
The Potential for Infrastructure Strains in Kansas............................................................46
Estimating Potential Economic Impacts in Kansas ..........................................................49
Coalbed Methane in Eastern Kansas ...................................................................................53
Assessing History: How the Oil and Gas Industry Has Contributed to the
Kansas Economy ..............................................................................................................................56
A Brief Economic History of Oil and Gas in Kansas .....................................................57
The Upstream Sector and Kansas Gross Domestic Product ..........................................62
The Overall Oil and Gas Value Chain in Kansas ..............................................................66
A Primer on the Kansas Severance Tax (K.S.A 79-4217) ................................................71
A Primer on Kansas Ad Valorem Taxation of Oil and Gas Property ...........................72
Appendix A: ..............................................................................................................................................73
Technical Details of Mississippian Lime Simulation Model and Economic
Impact Estimates ..............................................................................................................................73
Appendix B ...............................................................................................................................................75
Supplementary Data Tables .............................................................................................................75
Directory of Exhibits, Charts and Maps ..............................................................................................93
ii
1
The Kansas Oil and Gas Industry: An Enduring
Model of High-Tech Entrepreneurship
The oil game is one pioneering activity that has never had a frontier,
and until the last porous stratum of rock is explored it never can have
one. There would be mirth-provoking irony in a map of the United States
showing the boundaries, lateral and horizontal, beyond which dogmatists
have at one time or another said oil could not be found—which mental
barbed-wire fences have snapped under the irrepressible urge of the . . .
wildcatter’s boundless energy, curiosity, ambition, and skill with a string
of tools.
— Samuel W. Tait, Jr.
1
The renaissance in United States oil and gas produc-
tion reaffirms the timeless tribute Mr. Tait made to
the nation’s petroleum entrepreneurs almost 70 years
ago. The tools have changed—a lot—but the pioneer
spirit has not. Boundless entrepreneurial energy and an
increasingly sophisticated, high-tech string of tools has
created a genuine opportunity for the United States to
become a net energy exporter instead of a net energy
importer. Kansas helped deliver the original birth of
the U.S. oil and gas industry and now the state may help
deliver the industry’s rebirth.
Early in Kansas history, after the frst oil and gas booms,
people fretted about depleting the state’s oil and gas
reserves.
2
Similar fretting has taken place globally; the
notion of “peak oil” has attracted widespread attention
since at least the 1950s. These ideas can seem intuitive.
The earth is fnite.
Yet, such mindsets inevitably underestimate the power
of economics and the relentless drive of entrepreneurs.
Geologist Walter Youngquist captured a more apt per-
spective in a communication to Dan Merriam, Senior
Scientist Emeritus at the Kansas Geological Society:
“Kansas experience shows that aging oil regions can
still be given a drink from the Fountain of Youth if
the imagination and ingenuity of the human mind is
diligently and persistently applied.”
3
The independent oil and gas producers of Kansas have
demonstrated clear diligence and persistence. They have
drilled an average of 2,750 wells per year over the past
20 years, implying an average investment in the Kansas
economy of at least $700 million annually (in 2010
dollars). A group of entrepreneurial companies in the
Mid-Continent have poured decades of imagination and
ingenuity into the quest for developing unconventional
oil and gas supplies—the shale-related oil and gas sup-
plies that have recently captured the public’s attention.
High-tech entrepreneurship and economics help frame
the core defnitional element of “proved” oil and gas
reserves, underscoring Dr. Youngquist’s suggestion
that oil and gas supplies are a moving target, a result of
entrepreneurial initiative. The U.S. Energy Informa-
tion Administration defnes “proved reserves” as “the
estimated quantities which analysis of geological and
engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs
under existing economic and operating conditions.”
Since 1990, the U.S. has increased its proved reserves
of natural gas by 60 percent, back up to levels recorded
1 Samuel W. Tait, Jr., The Wildcatters: An Informal History of Oil-Hunting in America (Princeton: Princeton University Press, 1946),
p. xiii.
2 Phyllis Jacobs Griekspoor, “The First 150 Years: From the Efforts of the Early Kansas Explorers to the Modern Petroleum Indus-
try,” The Wichita Eagle Beacon Publishing Company, August 2010.
3 Daniel F. Merriam, “Advances in the Science and Technology of Finding and Producing Oil in Kansas: A Critique,” Oil-Industry
History, Vol. 7, No. 1, 2006, p. 44.
2
in the early 1970s. Proved reserves of crude oil have
also begun to increase. The changes have resulted
from entrepreneurs going after supplies that geologists
have long suspected to exist but could not be reached
in accord with the prevailing technology and econom-
ics—until now.
Like many dramatic changes in industry, what seems
sudden and new actually took decades to develop. The
word “fracking” has entered the public’s lexicon. But
the popular use of the term actually embodies three dif-
ferent, mutually-reinforcing (and increasingly integrated)
technologies:
1. Hydraulic fracturing. The term “fracking” refers
to a process of fracturing underground rock and
sediment layers to help trapped oil and gas fow
more freely. The idea dates back to the pre-1900
days of drilling in Kansas—only in those days a
few Wild-West-type gentlemen practiced the entre-
preneurial art of “shooting” a well with a nitroglyc-
erin-fueled “torpedo.” Kansas entrepreneurs used
this technique on the frst commercial oil well in
Kansas—the so-called Norman #1 well located in
Neodesha (drilled in 1892 and shot in 1893).
4
The
frst hydraulic fracturing experiment was conducted
in 1947 at the Hugoton gas feld in Grant County,
Kansas.
5
The process involves pumping a mixture
of fuid and sand into the well. The hydraulic pres-
sure fractures the rock and sediments. The sand
keeps the fractures open and porous.
Exhibit 1
A 3-D Seismic-Generated Image Underneath the Gulf of Mexico
A complete 3D picture of the subsurface near two producing oil ?elds in the Gulf of Mexico not only shows the sea bed at some 1,000m
water depth, but features such as salt structures in green and a salt diapir that penetrates the sea bed (white). Thin lines show the paths
of wells drilled to over 2000m below the sea bed to develop the ?elds, fanning out to penetrate various reservoirs. Shallow bodies in front
of the well paths on the left hand side may provide hazards to drilling. Oil ?eld reservoirs can be seen in color (yellows and reds) at deeper
levels. Most features are extracted from the actual data, though parts of two seismic pro?les are shown in black and white near the base of
the display.
Source: http://www.geolsoc.org.uk/gsl/geoscientist/features/page2722.html
4 Craig Miner, Discovery!: Cycles of Change in the Kansas Oil and gas Industry, 1860-1987 (Wichita, Kansas: KIOGA, 1987), p.
41.
5 http://en.wikipedia.org/wiki/Hydraulic_fracturing
3
2. Horizontal drilling. A patent for the forerun-
ner of horizontal drilling tools was issued in 1891.
The frst true horizontal well was drilled in 1929 in
Texas.
6
Techniques associated with horizontal drill-
ing gradually improved following World War II, but
the economics remained unfavorable until the late
1980s. Horizontal wells cost signifcantly more to
drill than traditional vertical wells. By about 1990,
horizontal wells comprised an estimated 10 percent
of all U.S. wells drilled. The improving technology
and economics (which often also implies a reduced
environmental footprint), motivated further expan-
sion of horizontal drilling, much of it in association
with the Austin chalk geologic formation in Texas
and the Bakken shale formation underneath Mon-
tana and North Dakota.
7
3. 3-D seismic imaging. Seismic imaging for pur-
pose of oil and gas exploration dates back to the
mid-1920s. The technology, in one way or another,
blasts sound waves into the earth and records the
echoes that return. Different substances produce
different echoes, creating identifable patterns. Early
techniques created 2-D images or cross sections of
the subsurface. 3-D techniques, signifcantly aided
by the advent of digital computer technology in the
1980s, allow for the creation of a three-dimensional
picture of the targeted subsurface. These 3-D pic-
tures can reveal much more detailed patterns and,
therefore, allow for much better precision in the
exploration and drilling processes. (Independent
producers in Kansas have put—continually-improv-
ing—3-D seismic imaging technology to work since
about 1990.
8
In many cases, it has brought new life
to old producing properties.) 3-D seismic imag-
ing projects cost about $40,000 per square mile in
Kansas. Exhibit 1 vividly demonstrates the types
of images that experts can create from raw 3-D
seismic data.
A complete list of causes contributing to the U.S. oil
and gas rebirth should also add: (1) well-defned private
property rights and (2) well-functioning futures markets.
As a Wall Street Journal editorial argued: “‘Whoever owns
the soil, it’s theirs up to Heaven and down to Hell.’ So
goes the ancient common-law principle. Today, however,
almost no major country recognizes full subsurface
private property rights, except for the United States.
. . . What has given the U.S. its edge is that the early
development risks were largely borne by small-time
entrepreneurs, drilling a lot of dry holes on private
land. These ‘wildcat’ developers were gradually able
to buy up oil, gas and mineral leases from private own-
ers while gathering enough geological data to bring in
commercial producers.”
9
Veteran petroleum economist
Philip Verleger has argued that: “Financial engineering
underpinned the renewal of U.S. oil and gas produc-
tion. While most writers and analysts credit petroleum,
chemical, and computer engineers for developing tech-
nologies that led to the rebirth of American oil and gas
output, the initial catalyst was the developers of futures
markets. The fnancial engineers who brought the risk
management techniques devised originally for agriculture
to energy provided a system that allowed smaller frms
to operate successfully despite very large swings in oil
and gas prices.”
10
Kansas producers have effectively employed all of these
innovations. Looking at Kansas opportunities prospec-
tively, horizontal-drilling technologies have made it pos-
sible to freshly explore the potential of rock formations
that have yielded oil and gas for years, as detailed below
in the Mississippian Lime discussion. Many of these
innovations may also help advance gas extraction from
the coalbeds of eastern Kansas, an enormous resource
that has received the attention of Kansas producers for
only a few decades.
6 Bill D. Berger and Kenneth E. Anderson, Modern Petroleum: A Basic Primer of the Industry, 3rd Edition (Tulsa: PennWell
Publishing Company, 1992), p. 127
7 American Petroleum Institute, et al., “Joint Association Survey on Drilling Costs, 1995”, p. 3.
8 Susan Nissen, et al. “3-D Seismic Applications by Independent Operators in Kansas,” Petroleum Technology Transfer
Council, January 2003. http://www.nmcpttc.org/Case_Studies/PTTCseismic_case/3d-seismic_appl.html
9 Editorial Board, Wall Street Journal, “The Shale Gas Secret,” July 13, 2012.
http://online.wsj.com/article/SB10001424052702303919504577520421300962752.html
10 Philip K. Verleger, Jr., “The Amazing Tale of U.S. Energy Independence,” The International Economy, Spring 2012, p. 54.
4
Visualizing the Model of
High-Tech Entrepreneurship
The laws of economics work in a vivid fashion in the
oil and gas industry. First, oil and gas have commodity-
like properties. Hydrocarbons extracted from different
geologies are not identical, but experts can measure and
economically value their differences. Second, the entire
oil and gas value chain—from hydrocarbons in the
ground to the consumption of end-use fuels—operates
within a constrained, chemistry-based, highly engineered,
and highly capital-intensive delivery system. These two
general industry attributes explain why the markets for
oil and gas—but most especially oil—operate as highly
integrated world markets—markets that react swiftly,
and often dramatically, to seemingly small disturbances.
Kansas producers, and their colleagues around the
world, succeed in these volatile world markets by being
more entrepreneurially deft than their competitors. The
essence of the high-tech entrepreneurship embodied in
the oil and gas industry can be captured by three sets of
metrics: the odds of drilling a producing well, the cost of
drilling a well, and the price of oil or gas. Chart 1, Chart
2, and Chart 3 capture these metrics. The upstream oil
and gas businesses face enormous discovery, production,
and price risks coupled with high-cost, capital-intensive
processes. The development of increasingly sophis-
ticated tools for management of the risks defnes the
high-tech nature of the oil and gas business. The will-
ingness to embrace and prudently manage the full array
and complexity of the risks defnes the entrepreneurship
necessary to succeed in the oil and gas business.
Chart 1 illustrates the recorded history of drilling in
Kansas. It counts four types of wells: wells that produce
oil; wells that produce natural gas (including coalbed
methane); wells used to service producing wells (perhaps
for the disposal of water or executing enhanced recovery
procedures); and wells that produce nothing—dry holes.
(Many wells, of course, produce both oil and natural gas.)
Over the entire history of Kansas oil and gas well drill-
ing, excluding service wells, 40 percent of the wells
drilled have been dry holes—expensive risks taken for
no economic gain. Notice on Chart 1, however, the
0
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4,000
6,000
8,000
10,000
12,000
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Oil Gas (including CBM) Service Dry Hole
Chart 1
Number of Kansas Wells Drilled, by Type, 1889-2011
Source: Kansas Geological Survey
5
steady decline in the percentage of dry holes over the
past three decades. During the 1970s, drilling in Kan-
sas resulted in dry holes 48 percent of the time; during
the 1980s, 42 percent of the time; during the 1990s, 31
percent of the time; and during the 2000s, dry holes
resulted 21 percent of the time. This improved success
rate tracks national trends and has primarily resulted
from superior—but more costly—technologies related
to oil and gas discovery. As mentioned above, Kansas
producers began using 3-D seismic imaging technology
about 1990, which helps explain the impressive gains in
cost-control related to drilling investments.
Chart 2 provides estimates on the average drilling costs
incurred in Kansas. Readily available cost of drilling data
begins in 1990. Based on the data in Chart 1 and Chart
2, Kansas oil and gas producers lost an average of about
$110 million per year on drilling dry holes.
The escalating costs beginning in 2004 have two general
explanations. First, as discussed below, escalating oil
and gas prices created a surge in demand for drilling
resources, thereby bidding up the cost. National data
show a similar escalation in per-well costs during the late
1970s and early 1980s, the years corresponding to the
Kansas drilling surge shown in Chart 1. Second, accord-
ing to Kansas Geological Survey records, the average
depth of Kansas wells increased in a stepwise fashion
from 2,565 feet in 2006 to 2,932 in 2009. (Nationwide,
the increase in horizontal drilling techniques have driven
up the average cost per well. Horizontal wells can more
than double the cost per foot to drill compared to tra-
ditional vertical wells.
11
However, horizontal wells in
Kansas represent less than one percent of wells drilled.)
Map 1 shows why the average drilling cost estimates
reported in Chart 2 require a broader perspective. Aver-
age well depths vary signifcantly from one part of the
Kansas to the next. Table 1 provides estimates of the
average per-foot costs implied by the per-well costs
reported in Chart 2. (Table B1 in Appendix B reports
by county the number of wells drilled in each county
and the depth of the deepest well drilled in each county.)
11 http://www.horizontaldrilling.org/
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Chart 2
Kansas Cost Per Well Drilled, by Type (2010$)
Source: Kansas Geological Survey
6
Table 1
Estimated Average Well Cost per Foot,
Select Years
2006 2007 2008 2009
Oil $100 $131 $168 $179
Gas 140 176 216 361
Dry 66 72 82 132
Successful discovery of oil or gas and the development
of a producing well do not guarantee business success.
The business must sell the production volumes at prices
suffcient to cover the development and production
costs—and the business owners’ opportunity costs
of investment capital. World markets set oil and gas
prices; Kansas producers must accept these prices if
they choose to sell.
Chart 3 shows infation-adjusted monthly prices for
Kansas oil and natural gas from 1978 through 2011.
Statistical tests confrm what the eye can see: the prices
of oil and gas have become more volatile in the past
decade than they were in the previous two decades.
Notice that the prices of oil and natural gas tend to move
together (although natural gas prices tend to have greater
volatility than oil prices). Before the clear deviation in
the two price series beginning in January 2010, the two
Kansas price series had a statistical correlation coeffcient
of 0.56, where a coeffcient of 1.0 indicates perfect
co-movement. (Nationally, the correlation coeffcient
was 0.75.) From January 2010 to December 2011, the
coeffcient became -0.55, indicating a stark divergence
of price trends rather than the traditional co-movement.
The volatility of prices underscores a key entrepreneurial
risk faced by Kansas oil and gas producers.
Historically, natural gas prices have adjusted (imper-
fectly) to the movement in oil prices, because natural
gas and refned petroleum products have competed as
the fuel of choice for a variety of industrial uses. No
doubt this price-linkage will eventually restore itself as
producers adjust to the natural gas price decline related
to the recent, technology-induced surge in production.
(A more detailed discussion of oil and gas price-setting
mechanisms follows.)
Key: Avg. Well Depth
Less than 1,000
1,000 to 3,000
3,000 to 5,000
More than 5,000
846
Allen
816
Anderson
1,984
Atchison
4,659
Barber
3,414
Barton
626
Bourbon
3,087
Brown
2,351
Butler
1,516
Chase
1,410
Chautauqua
536
Cherokee
2,552
Cheyenne
5,515
Clark
2,189
Clay
3,165
Cloud
1,347
Coffey
5,430
Comanche
2,916
Cowley
357
Crawford
3,770
Decatur
2,540
Dickinson
1,968
Doniphan
857
Douglas
4,494
Edwards
1,593
Elk
3,600
Ellis
3,228
Ellsworth
3,909
Finney
5,013
Ford
732
Franklin
2,283
Geary
4,368
Gove
3,868
Graham
3,384
Grant
5,036
Gray
4,017
Greeley
2,024
Greenwood
3,030
Hamilton
4,557
Harper
3,265
Harvey
4,505
Haskell
4,512
Hodgeman
3,078
Jackson
1,622
Jefferson
3,818
Jewell
847
Johnson
3,269
Kearny
4,172
Kingman
4,829
Kiowa
721
Labette
4,558
Lane
1,357
Leavenworth
3,230
Lincoln
547
Linn
4,655
Logan
2,331
Lyon
2,577
Marion
1,865
Marshall
3,130
Mcpherson
5,720
Meade
545
Miami
3,860
Mitchell
950
Montgomery
2,110
Morris
4,240
Morton
3,322
Nemaha
767
Neosho
4,397
Ness
3,675
Norton
1,880
Osage
3,520
Osborne
3,442
Ottawa
4,019
Pawnee
3,485
Phillips
2,437
Pottawatomie
4,329
Pratt
4,359
Rawlins
3,671
Reno
3,186
Republic
3,320
Rice
1,861
Riley
3,539
Rooks
3,780
Rush
3,164
Russell
3,055
Saline
4,449
Scott
3,273
Sedgwick
5,268
Seward
2,329
Shawnee
4,044
Sheridan
2,530
Sherman
3,622
Smith
3,845
Stafford
4,119
Stanton
4,232
Stevens
3,567
Sumner
4,618
Thomas
4,021
Trego
2,888
Wabaunsee
4,794
Wallace
3,270
Washington
4,672
Wichita
1,036
Wilson
1,225
Woodson
588
Wyandotte
Map 1
Average Well Depths by County, in Feet
Source: Kansas Geological Survey
7
The maturity of the Kansas oil and gas industry intensi-
fes rather than ameliorates the entrepreneurial challenge
faced by Kansas producers. Pending further discoveries,
Kansas producers have already found the large oil and
gas pools. So-called marginal wells (or stripper wells)
account for a large percentage of Kansas oil and gas
production. Defnitions can vary, but the industry typi-
cally defnes a marginal oil well as one that produces 10
barrels of oil per day or less over a 12 month period and
defnes a marginal gas well as one that produces 60,000
cubic feet per day or less. Using these defnitions, from
2005 through 2009, marginal oil wells accounted for
61.4 percent of Kansas production and marginal gas
wells accounted for 30.0 percent of Kansas produc-
tion. Expanding the defnition to 15 barrels per day
for oil wells and 80,000 cubic feet per day for gas wells,
the averages, respectively become 68.5 percent and 66.6
percent.
12
For Kansas producers, the predominance of stripper
wells adds to entrepreneurial risk for two reasons. First,
Kansas businesses specializing in production must have
an active drilling program to keep a full portfolio of pro-
ducing wells—wells that they expect will have relatively
low reserves or relatively low production rates. This
facet of the industry, in part, helps explain why Kansas
ranks ffth among the states in the total number of wells
drilled, as reported in Chart 8, but ranks ninth in total
production, as illustrated in Chart 9. (See Table B2,
B3, and B4 in Appendix B for more detailed state-by-
state drilling data.) Second, the relatively low revenue
generation created per stripper wells makes drilling and
operating costs per well a more substantial part of the
proft-or-loss equation.
To provide insight into the mechanics and economics
of stripper wells, Chart 4 and Chart 5 provide a portrait
of one such oil well and Chart 6 and Chart 7 provide a
portrait of one such gas well. On average, the oil well
has produced 11.3 barrels per day and the gas well has
produced 51,407 cubic feet per day. Notice several
important features of these portraits:
12 U.S. Energy Information Administration: http://www.eia.gov/pub/oil_gas/petrosystem/ks_table.html
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Chart 3
Price of Kansas Oil & Natural Gas (2010$)
Source: U.S. Energy Information Administration; Independent Oil & Gas Services (Red Top News)
8
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Revenue Total Operatng Costs Tax Component of Operatng Costs
Start-Up Costs (Drilling and Equipment, 2010$): $211,489
Internal Rate of Return on Investment: 3.12%
Chart 5
Example Oil Well: Revenues and Operating Costs (2010$)
Source: KIOGA member company.
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Oil Producton Oil Price (2010$)
Chart 4
Example Oil Well: Production Curve and Oil Prices (2010$)
9
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$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
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Revenue Total Operatng Costs Tax Component of Operatng Costs
Start-Up Costs (Drilling and Equipment, 2010$): $191,320
Internal Rate of Return on Investment: 1.76%
Chart 7
Example Gas Well: Revenues and Operating Costs (2010$)
Source: KIOGA member company.
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Natural Gas Producton Natural Gas Price (2010$)
Chart 6
Example Gas Well: Production Curve and Gas Prices (2010$)
10
• Oil and gas wells have limited reserves. The
industry often describes the characteristics of a
given well by its “decline curve.” Each well faces
different decline characteristics, depending on
the associated geology producing the oil or gas.
Chart 4 and Chart 6 both show decline curves,
although the decline element is more pro-
nounced for the gas well. These decline curves
factor into the effort by production companies
to maintain their portfolio of producing wells
through an on-going drilling program.
• Chart 4 and Chart 6 include the price of oil and
gas received by the producer. As mentioned
above and discussed in detail below, Kansas
producers must accept market prices as a risk
factor beyond their control. With regard to the
time period covered by the charts, oil prices have
shown a favorable trend and gas prices have
shown an unfavorable trend, primarily because
of the price collapse in 2008 that took the price
back to 2002 levels.
• The production volatility and price volatility
combine to generate the revenue volatility
illustrated in Chart 5 and Chart 7. The overall
pattern of revenue volatility (when combined
with the pattern of costs) plays a signifcant role
in determining the producer’s and investors’ rate
of return on the well. The oil well has gener-
ated an infation-adjusted rate of return of 3.12
percent; the gas well 1.76 percent.
• Drilling costs (and the other costs associated
with bringing a well on-line) happen up-front,
of course. Note on Chart 5 and Chart 7 that the
drilling costs for the example oil and gas well at
$211,489 and $191,320, respectively, are roughly
consistent with the statewide averages illustrated
in Chart 2. These costs have a signifcant impact
on a well’s investment rate of return.
• The on-going operating costs of a well may
be less obvious to people unfamiliar with the
oil and gas business. These costs—and the
time pattern in which they materialize—act as
0
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Oil Natural Gas Dry Hole
Kansas Rank in Oil Wells Drilled: 3rd
Kansas Rank in Gas Wells Drilled: 7th
Kansas Rank in Dry Wells Drilled: 2nd
Chart 8
Total Number of Oil, Gas, and Dry Wells Drilled by State, 2005-2009
Source: IHS Energy; Independent Petroleum Association of America
11
a substantial risk factor in the economics of a
well. Chart 5 and Chart 7 illustrate total operat-
ing costs and the tax-related subcomponent of
operating costs. For the oil well, the primary
non-tax operating costs involve well repairs,
electricity consumption, and salt water disposal.
For the gas well, the primary non-tax operating
costs involve labor for pumpers, who measure
and maintain the well, and overhead expenses
associated with the business management of
the well. The large spikes in the tax-related
operating costs come from the (primarily local
government) property tax. As explained toward
the end of the report, Kansas law levies prop-
erty tax on oil and gas reserves in the ground.
A signifcant part of the tax calculation derives
from an estimated price set for a prospective tax
year by the Kansas Department of Revenue; this
procedure represents another, less obvious, way
in which price risk can infuence the economics
of a well for Kansas producers. The other taxes
result from the severance tax and the production
tax (a conservation fee charged by the Kansas
Corporation Commission).
In summary, an oil and gas producer’s ultimate success
depends on replacing his reserves in a timely and eco-
nomic manner. Once each well’s production has declined
to the point that the revenues will no longer cover its
operating costs, the well has reached its economic limit—
despite the fact it may still hold recoverable oil or gas.
Once a well has reached its economic limit, the producer
must evaluate different options. One likely option will
involve plugging the well, removing the equipment, and
forfeiting the leasehold interest in the land on which
the well sits. In Kansas, the operator of a well has the
ultimately responsible for plugging it.
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Oil Natural Gas (Barrel of Oil Equivalent)
Kansas Rank in Oil Producton: 9th
Kansas Rank in Gas Producton: 10th
Chart 9
Total Oil and Gas Production by State, 2005-2009
Source: U.S. Energy Information Administration
12
Understanding Global
Price-Setting Mechanisms in
the Context of Integrated
Global Markets
Kansas producers must accept daily oil and gas prices
as an outcome beyond their control. Economists refer
to them as “price takers,” because they do not produce
enough oil or gas to have any infuence on global price-
setting mechanisms. For perspective, consider that
Saudi Arabia’s giant Ghawar oil feld produces about
fve million barrels per day.
13
That means the weekly
production from this one feld almost equals Kansas’
annual production of about 40 million barrels.
Chart 10 compares two widely traded crude oils with
a crude oil known as Kansas Common, one of a few
different types of Kansas crudes. The chart tells two
important stories relevant for Kansas producers, as price
takers. First, it shows that different crude oils tend to
have relatively stable spot-market price-spreads relative
to one another. Second, and more importantly, it shows
how closely world crude oil prices tend to move together.
West Texas Intermediate (WTI) and Brent (a blend of
crudes extracted from the North Sea) represent two of
the three primary crude oil benchmarks in the world
trading system. (The third is Dubai.) They trade more
than any other types of crude oil in the world, because
they form the basis for standardized futures contracts.
WTI is the benchmark crude for futures contracts traded
on the New York Mercantile Exchange. Such contracts
specify Cushing, Oklahoma as the physical delivery point,
although most futures contracts terminate without the
requirement of physical delivery.
Crude oils extracted from different geographies and
geologies have different physical and chemical proper-
ties. The establishment of benchmark crude oils helps
the world trading system set crude oil prices because
the benchmark crudes have well-defned physical and
chemical properties that market participants can use
for comparison against many other crude oils. The
13 http://en.wikipedia.org/wiki/Ghawar_Field
$0
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Chart 10
A Comparison of Prices for Select Crude Oils (2010$)
Source: U.S. Energy Information Administration; National Cooperative Re?nery Association
13
differences help determine prices because they have
practical importance for oil refners—the key customer
of oil producers.
Oil refning is a capital-intensive, chemistry-driven manu-
facturing process. Not all refneries have equal process-
ing capability, and changes to capability requires long
lead times for planning, capital investment, engineering,
and construction. The confguration of a given refnery
has signifcance for the processing required to proftably
refne the petroleum products that end-use consumers
demand. Consequently, refners do not necessarily view
different crude oils as perfect substitutes; they will value
different crudes differently.
Generally, refners will offer lower prices for crude oils
that require more processing to extract the petroleum
products most highly valued by end-use consumers.
Table 2 offers an example from the average per-barrel
prices posted in December 2011 by two Kansas-based
refneries, the National Cooperative Refnery Association
located in McPherson, Kansas and Coffeyville Resources
located in Coffeyville, Kansas. The posted prices indicate
the starting point for negotiations. Transportation costs
and other market factors will contribute to the fnal price
received by a given oil producer. Notice that, consistent
with Chart 10, Kansas Common trades at a price lower
than WTI. Also notice that the “sweet” crudes have
a higher offer price than the “sour” crudes, because
the sour crudes have more sulfur, which often requires
additional processing, and also often requires different
transportation and storage in order to keep it isolated
from sweet crude.
Table 2
Average December 2011 Posted Prices per Barrel
for Diferent Crude Oils
Crude Oil Type NCRA Coffeyville
Resources
Kansas Common $88.34 $88.34
Eastern Kansas 83.09 86.09
South Central Kansas n/a 90.59
Nebraska Intermediate 86.59 86.09
Oklahoma Sweet 89.09 94.98
Western Oklahoma Sweet 88.59 n/a
Oklahoma Sour n/a 82.59
West Texas Intermediate (WTI) 89.09 94.98
West Texas Sour 85.09 n/a
Wyoming Sweet n/a 86.34
Source: Company websites
The price ultimately received by an oil producer obvi-
ously matters from a business perspective. However, the
price spreads among different crudes tend to be relatively
stable. The price is much less stable.
PRICE RISK AS A FORM ON ENTREPRENEURIAL RISK
The large trading volume of WTI (and Brent) suggests
that it acts a price-setting mechanism for Kansas crude
oils. Chart 10, like Chart 3, illustrates the volatile nature
of oil prices, along with the tight co-movement among
WTI, Brent, and Kansas Common. The monthly price
movements of WTI and Kansas Common, for the
dates shown in Chart 10, have a statistical correlation
of 0.998, where 1.0 would mean perfect statistical co-
movement. The statistical co-movement of Brent and
Kansas Common would be just as tight if it were not
for the divergence of Brent from WTI starting in 2011;
a divergence that has an interesting meaning for world
oil markets, as discussed later.
Kansas producers’ price-taker status means that the
volatility of oil prices vividly captures the entrepreneurial
Exhibit 2
Select Operating Information for Kansas-Based Oil Refneries
National Cooperative Coffeyville Resources HollyFrontier
Re?nery Association LLC (CRV Energy) Corporation
Location McPherson Coffeyville El Dorado
Capacity (Barrels per Day) 87,000 115,000 135,000
Throughput of Kansas Crude (%) 57-69% 20-22% 0-5%
Primary Product Member-owned Arkansas, Iowa, Eastern Colorado
Marketing Area cooperatives in Kansas, Missouri, Nebraska, (including Denver),
North Central U.S. Oklahoma and South Dakota Eastern Wyoming,
Plains states.
Source: Company websites and spokespersons
14
challenge that Kansas oil (and gas) producers face in
controlling their price-related business risks. Statistical
research indicates that oil prices behave in a fashion
known as a “random walk,” meaning that the time path
of price changes can be characterized as a sequence of
random steps.
14
Producers can never confdently predict
from one period to the next whether the price will go up
or go down—or even if an upward or downward trend
will prevail. At any given point in time, the current price
of oil might be the most realistic forecast, regardless of
how far into the future producers choose to project.
Table 3
99% Confdence Intervals for Oil Price Forecasts
Forecast Years Forecast Lower Upper
into the Future Price Bound Bound
1 $89.53 $42.06 $177.72
2 89.53 29.93 224.96
3 89.53 22.70 270.65
4 89.53 18.25 310.89
5 89.53 14.47 360.56
ROI from
Example in Text 59% -2.85% 149%
But any particular oil price forecast could be wildly
wrong—and the imprecision becomes more amplifed
the further into the future the producer tries to forecast.
To construct an example, refer back to Chart 3. Suppose
a Kansas oil producer tried to forecast oil prices from
December 2011 forward. In that month (the last data
point in Chart 3), the average price of oil was $89.53.
Adopting the proposition that oil prices move as a ran-
dom walk, $89.53 is as good a forecast as any. However,
note the signifcant breadth of possible price ranges
captured by the statistical confdence intervals in Table
3. These confdence intervals derive from a computer
simulation of a random walk process informed by the
oil price data shown in Chart 3.
15
Statistically speaking,
the intervals represent the lower- and upper-bound of
the price ranges in which a producer could be 99 percent
confdent that the actual price would fall for a forecast
of from one to fve years into the future.
To put such unpredictability into an entrepreneurial
proft-or-loss perspective, consider a simplistic example.
Suppose that a Kansas producer intends to develop a
new stripper well that will produce with certainty 10
barrels of oil per day for fve years. Drilling the well
will cost $500,000 (see Chart 2). A forecast price of
$89.53 per year is a great price for Kansas producers (and
Kansas property tax appraisers): given the assumptions,
it offers the potential for a 59 percent rate of return on
the investment after fve years. However, if the example
uses the Table 3 per-year lower- and upper-bound price
instead of $89.53, the producer could face rates of return
on investment (ROI) ranging from -2.85 percent to 149
percent. Producers, as entrepreneurs, face substantial
fnancial risks—and the potential for handsome rewards.
(From a theoretical perspective, if the low price series
arrived, the producer could choose to keep the oil in the
ground, but the drilling costs will have been incurred, so
the rate of return on the investment will decline as time
elapses. From a practical perspective, however, a variety
of contractual arrangement related to land leases and
engineering issues related to well stewardship generally
make shutting in a well a cost-ineffective proposition.)
TRENDS IN THE GLOBAL CONSUMPTION AND
PRODUCTION OF OIL
The general inability to predict oil prices results from the
dynamic market processes taking place on a global scale.
Crude oils trade in integrated world markets. The forces
of global supply and demand set their prices. To make
that statement is easy. To understand it in detail is hard.
Market prices play two fundamental roles. At a macro
level, they act as a key mechanism for allocating scarce
resources to their highest-valued use. At a micro level,
they act as a vital tool for discovery; they act as the signal
by which millions of individual actors in the marketplace
make their decisions vis-à-vis all of the other actors. The
more visible outcomes at the macro level result from
the much less visible outcome of the millions of daily
decisions that take place at the micro level, where time-
and-place details and differences in perception matter.
Charts 11, Chart 12, and Chart 13, taken together, offer
a way to summarize what has taken place at the macro
14 James D. Hamilton, “Understanding Crude Oil Prices,” The Energy Journal, Vol. 30, No. 2, 2009, p. 181.
15 The simulation generated 10,000 different price observations using a model of geometric Brownian motion for each of the forecast
years. The monthly percent change in the price series has a standard deviation of 8.1%.
15
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Chart 12
Oil Consumption-Production Gap and Oil Price (2010$)
Source: BP Statistical Review of World Energy, June 2011; Center for Applied Economics, KU School of Business
30
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Chart 11
World Oil Production and Consumption
16
level of the world crude oil market over the past few
decades. The rapid escalation—and rapid collapse—of
world oil prices between 2004 and 2009, shown in Chart
12, offers a useful case study for learning the global oil
price-setting mechanisms. The discussion will build out
the case study over the next several sections, as appropri-
ate. The macro story suggests that the price escalation
has explanations grounded in the fundamentals of supply
and demand—not the activity of “speculators” often
discussed in the popular media.
Chart 11 compares total world oil consumption with
total world oil production. Notice the gap between the
two curves. Before the early 1980s production exceeded
consumption; then consumption began to exceed pro-
duction. Stored inventories (stocks) of crude oil make
possible the levels of consumption that exceed produc-
tion. Inventory management is a fundamental aspect of
petroleum markets—and the level of inventories plays a
role in the global price-setting mechanism for crude oil.
Chart 12 compares two tends: (1) the trend in world oil
prices (based, since 1984, on Brent at specifc shipping
dates) and (2) the gap between consumption and produc-
tion, derived from Chart 11.
Volatility in the consumption-production gap has some
relationship to the volatility of prices. A larger gap
means that consumption grew relative to production,
suggesting that demand grew relative to supply, result-
ing in higher prices (and vice versa). For example, from
1965 to 1972, production levels exceed consumption
levels and oil prices remained low and stable. In October
of 1973, several oil-producing Arab countries declared
an oil embargo to protest U.S. support for Israel in the
Yom Kippur War. The price spiked in anticipation of
the reduced supply and then receded as more knowledge
became available about market conditions. The same
thing happened in 1979 and 1980 in the context of the
Iranian Revolution and the Iran-Iraq war. The higher
prices (and uncertainty of future supplies) motivated
non-Arab countries to increase exploration and produc-
tion (see Chart 13). That response ended up producing
an oil glut in the 1980s that signifcantly reduced prices
until the 2004-2009 events discussed below.
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Chart 13
Trends in World Oil Production and Consumption
Source: BP Statistical Review of World Energy, June 2011; Center for Applied Economics, KU School of Business
17
Chart 13 provides a broad indication of who was doing
the consuming (demanding) and producing (supplying).
It provides relative growth trends for consumption and
production. Two curves show consumption trends for
countries belonging to the Organization for Economic
Co-operation and Development (OECD), generally the
more industrialized countries, and all those not belong-
ing to the OECD. Two other curves show production
trends for countries belonging to the Organization of the
Petroleum Exporting Countries (OPEC) and all those
not belonging to OPEC.
In 1990, non-OECD countries represented about 37 per-
cent of world oil consumption; by 2010, they represented
about 47 percent. On a 2010 consumption-weighted
basis, the top-fve non-OECD countries in terms of the
1990-to-2010 growth of oil consumption were: China,
India, Saudi Arabia, Brazil, and Iran.
Saudi Arabia and Iran are also two key members of
OPEC. The economic growth of many OPEC countries
has resulted in them consuming an increasing share of
their domestic oil production. OPEC countries supplied
about 41 percent of world production in 2010. As the
chart suggests, OPEC has steadily resumed a larger share
of world production following the oil glut of the 1980s.
DETAILS RELATED TO OIL SUPPLY
Recall, with reference to Chart 11, that crude oil invento-
ries must account for the gap between oil consumption
and oil production. From 1998 to 1999, inventories
increase signifcantly and then begin to shrink, in fts
and starts, until 2004. Chart 12 shows that the price
of oil responded as expected, dropping and then rising,
based on the fuctuation in the gap. Chart 13 shows that
OPEC production leveled-off from its past growth at
exactly the same time.
The post-1998 events began with a March 1998 meeting
of OPEC and certain non-OPEC countries (Mexico,
Norway, and Russia). Saudi Arabia and Venezuela con-
vened the meeting. The Saudis, with full support from
Venezuela, made it clear that they would act to further
drive down prices if the group did not embrace the
Saudis’ desire to engage in a program of production
control aimed at boosting the price of crude oil. The
group complied.
16
Interestingly, however, cuts in OPEC oil production
per se did not cause the increase in oil price, as intuition
might suggest. Instead, Saudi Arabia (and others) opera-
tionalized the OPEC effort by working to manage the
world’s crude oil inventories. This approach highlights
an important institutional feature of world oil markets—
and OPEC’s market power.
17
Unlike Kansas producers, who are price-takers, Saudi
Arabia and other OPEC producers are price-makers.
They announce the price at which they will sell (set as a
fxed spread relative to well-defned market benchmarks,
like WTI and Brent) and purchasers react to the admin-
istratively set price spread(s).
The 1998 price drop resulted from an increase in sup-
ply represented by a gradual build-up of oil inventories.
The low prices motivated the Saudis to call their OPEC
meeting. Price drifted higher, as shown in Chart 12, as
OPEC’s higher asking prices worked to manage (reduce)
world inventories (as shown in Chart 11). The drop in
OPEC production resulted from the drop in purchases
triggered by OPEC’s price-setting policies, as purchas-
ers found it more economical to draw down inventories.
The Saudi-led program worked as designed.
18
A sharp
drop in inventories occurred in 1999. After that, inven-
tory levels generally grew in absolute level, but at rates
slower than the rate of the growth of oil consumption.
19
An important economic issue related to oil supply is the
responsiveness of producers to price changes, particu-
larly price increases. Economists use the term “price
elasticity” to characterize the idea of responsiveness.
The so-called law of supply says that, all else equal, pro-
ducers will increase the quantity supplied of oil as the
price increases (and vice versa). Supply is “inelastic” if
16 Philip K. Verleger, Jr., “Anatomy of the 10-Year Cycle in Crude Oil Prices,” March 2009, p. 6. https://www.theice.com/publicdocs/
globalmarketfacts/docs/newsexperts/Anatomy_of_Price_Cycle_0309.pdf
17 Ibid., p. 7.
18 Ibid., p. 12-13.
19 http://www.eia.gov/emeu/international/oilstocks.html
18
a one percent increase in price results in less than a one
percent increase in quantity supplied. Supply is “elastic”
if a one percent increase in price results in more than a
one percent increase in quantity supplied.
The notion of the elasticity of supply has a short run
and a long run perspective. Producers cannot respond
immediately to a demand-driven price increase if they
already have their wells producing at their maximum
fow rates. In such a situation, producers must drill new
wells to respond to an increase in demand. That takes
time and money, which highlights two important points.
First, economists generally expect a much more inelastic
price elasticity of supply in the short run compared to the
long run (depending on the excess production capacity
of existing wells or oil in storage). The more inelastic
the supply response relative to demand-driven changes
in price, the more price volatility market participants
will experience. Second, demand-driven price increases
make it possible to proftably explore for and produce
more expensive sources of supply. (Recall that proft-
able production with known technology is a defnitional
component of the “proved reserves” of oil or gas.) This
point is important for Kansas producers, because they
face much higher incremental production costs than
many of the world’s produces.
Chart 14 shows that the law of supply operates as
expected in the state of Kansas. (Charts 12 and Chart
13 helped show that it also operates as expected globally.)
The chart compares infation-adjusted annual average oil
prices that Kansas producers received at the wellhead
with the combined number of oil wells, service wells,
and dry holes drilled one year after the year of the price
reported on the chart. For example, the “2010” data
point shown on the chart indicates that the price in 2010
($72.43 per barrel) and the combined number of wells
drilled in 2011 (3,843).
Examination of Chart 14 provides some insight into
the time dimension associated with the Kansas price
elasticity of supply. Oil prices escalated signifcantly in
the 1970s—and peaked in 1980. Notice the escalating
response in wells drilled (keeping in mind the year-after-
price interpretation of the chart) resulting from prices
1978
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Chart 14
Kansas Wellhead Oil Price (2010$) and Non-Gas Wells Drilled One Year Later
Source: U.S. Energy Information Administration; Kansas Geological Survey
19
reported for 1978 through 1981, and the rapid drop in
drilling once it became clear prices had begun to fall.
The same general pattern resulted for the 2004 through
2011 episode, but the price increases happened quickly
and in a somewhat erratic fashion, so producers did not
demonstrate as strong a response as in the 1970s episode.
(Recall also from Chart 1 that Kansas producers drilled
signifcantly fewer dry holes in percentage terms in the
more recent time period.)
PHYSICAL MARKETS AND PAPER MARKETS: PRELUDE
TO DISCUSSION OF OIL DEMAND
“Speculators” often receive the blame for episodes of
commodity price increases—like the oil price surge from
2007 to 2008 shown in Chart 12. Investigations into such
charges usually reveal that market fundamentals related
to supply and demand provide the more compelling
explanations of price movements. A basic understanding
of the institutional mechanisms that support “specula-
tion” helps to explain why.
Crude oil, along with many other commodities, trades
in physical markets and “paper” markets. The physical
market represents the actual handling, processing, and
movement of crude oil and refned petroleum products.
The paper market primarily represents the buying and
selling of oil-based futures contracts (and related fnan-
cial derivatives). With regard to “speculators” causing
sudden price changes, one point deserves emphasis: the
paper market works in a way that has no automatic spill-
over infuence on the activity in the physical market—the
actual supply of and demand for oil.
Futures markets generate enormous benefts for the
buyers and sellers of commodities. They serviced the
market for agricultural products for more than a century
before being applied to the markets related to oil and gas.
A futures contract is simply a business deal between
two or more parties: for example, an obligation to
deliver a specifed volume of crude oil at a specifed
place and time for a specifed price. Commodity futures
exchanges—like the Chicago and New York Mercantile
Exchanges—create the institutional foundation for the
creation and trade of futures contracts (the futures mar-
ket). The exchanges standardize contracts, oversee rules
for orderly trading, and act as clearinghouses for contract
settlements. Participants in the physical markets typi-
cally also act as participants in the paper market. Many
participants in the paper market never participate in the
physical market, because the institutional features of the
exchanges make it possible for anyone to participate in
futures markets without having to ever physically handle
the commodities that form the basis of the futures
contracts; they can settle their contracts for cash. This
institutional feature helps explain why activity in the
futures market determines the price of futures contracts,
but not necessarily the price of the underlying commodi-
ties. Each market—the physical and the paper—has its
own fundamentals.
Markets aggregate information and embed it into a
single metric: price. The information built into the price
embodies the unique perspectives of all participants in
the market. The price, in turn, provides feedback that
further infuences the unique perspectives of the market
participants. It is an on-going, iterative process. Markets
are institutions that discover the prices that best allocate
resources to their highest-valued use (and users).
The notion of markets as a price-discovery process
makes the practical difference between the terms
“speculator” and “entrepreneur” almost meaningless,
from an economic perspective. A Kansas oil and gas
producer that decides to drill a wildcat well can just as
easily be called a “speculator” as an “entrepreneur.”
An oil trader in New York City who believes that “the
market” is underpricing oil because it is underestimat-
ing the demand for heating oil—and buys oil futures
based on an expectation that oil prices will eventually
rise—can just as easily be called an “entrepreneur” as
a “speculator.” The risk-based calculation driving the
action of each participant feeds information into the
market that infuences the price of oil, and thereby helps
the other participants make better risk-based calculations
for decision-making.
Research on the interaction between physical markets
and paper markets helps confrm the symbiotic rela-
tionship between the physical and paper markets. One
(imperfect) way of testing for causality is to determine
what comes frst: “speculative” trades in the paper market
20
for oil or spot price increases in the physical market for
oil. The tests tend to show that the two items often
switch places. Price discovery often takes place in the
paper market, but trades in the paper market often react
to changes in the physical market.
20
Futures contracts and well-functioning futures markets
have several noteworthy attributes:
1. Participants in the physical market for crude oil (or
any other commodity) use them as a tool to manage
price risk. Through a process called hedging (buy-
ing futures contracts that specify future prices) oil
producers or oil buyers can secure a known price to
help business planning. The presence of “specula-
tors” in the futures market reinforces this benefcial
process rather than undermines it.
2. Hedging helps producers, as entrepreneurs, because
the ability to manage price risk makes it easier to
secure investment capital for new projects.
3. By mechanical necessity of the way futures contracts
work (a guaranteed price at a guaranteed time), the
market price of a particular futures contracts will
always converge to the spot price of the underlying
commodity at the time the contract expires. In the
futures market, every gain is matched by a loss (and
vice versa). The net fnancial result of every trade
nets to zero from the perspective of the futures
market—usually in the context of a cash settlement.
Consequently, there is nothing about the supply and
demand for futures contracts that inherently infu-
ences the supply and demand for physical crude oil
(or any other commodity); meaning that there is
nothing inherent in the activity of futures markets
that infuences the (spot) price of oil.
4. Trading activity in the futures market can only infu-
ence the spot price of crude oil if the price signals
in the futures market convince participants in the
physical markets to alter production rates or change
20 Bahattin Büyüksahib and Jeffrey H. Harris, “Do Speculators Drive Crude Oil Futures Prices?” The Energy Journal, Vol. 32, No. 3,
2011, pp. 167-202.
$58.89
$59.14
$60.83
$62.07
$63.00
$79.92
$79.63
$78.47
$77.45
$76.71
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Spot Contract 1 Contract 2 Contract 3 Contract 4
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October 2006 September 2007
Chart 15
Examples of Contango and Backwardation in the Futures Market for West Texas Intermediate Crude Oil
Source: U.S. Energy Information Administration
21
net inventory levels to an extent suffcient to alter
supply enough to change prices.
The last point is critical to understanding whether or
not “speculators” caused, in whole or in part, the oil
price surge from 2006 to 2008. Chart 15, Chart 16, and
Chart 17 provide useful perspectives for evaluating the
situation.
Chart 15 is educational in nature for those readers
uninitiated with futures markets. It shows two different
months in the 2006-to-2008 time frame—one month
(October 2006) when the futures market for WTI was
in “contango” and one month (September 2007) when
it was in “backwardation.” Contango refers to a situa-
tion in which the contact price for WTI is higher in the
future than the present. Backwardation refers to the
opposite situation—the contract price for WTI is lower
in the future than the present. When markets move into
contango, an economic incentive arises to hold crude
oil inventories (which could include storing crude in
the ground by deferring production). For example, in
simplest terms, in October 2006, someone could buy a
barrel of WTI for $58.89 and sell it four months later for
$63.00. This plan would make sense if the price spread
covered all of the costs associated with holding the crude
oil. The level of the price does not matter—only the
price spread matters.
Chart 16 demonstrates that the market generally behaves
as theory predicts. It shows four data series:
1. The 3
rd
month WTI futures price less the WTI spot
price.
2. The volume of crude oil inventories (stocks) held in
the Petroleum Administration for Defense District
(PADD) 2, which includes Cushing, Oklahoma,
the delivery point for WTI futures contracts. The
volumes exclude those held in the U.S. government’s
Strategic Petroleum Reserve, in order to better cap-
ture private business activity. (The stock levels have
been arbitrarily, but proportionately, compressed to
0
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Contract 3 less Spot PADD 2 Stocks ÷ 30 Million
Avg. Stock Level (before 2009) WTI Spot Price (Log Form)
Chart 16
Relationship among Futures Curves, Crude Stocks, and WTI Spot Prices
Source: U.S. Energy Information Administration
22
allow for a visually convenient comparison against
other data series.)
3. The average (adjusted) PADD 2 stock levels
before 2009, for purposes of establishing a visual
benchmark.
4. The WTI spot price, charted in natural logarithm
form for visual convenience.
When the WTI futures market has been in contango
(blue bars above $0.0), oil inventories have tended to
increase. When the market has been in backwardation,
oil stocks have tended to decrease. Over the time period
presented, PADD 2 oil stocks and the price spread reg-
istered a statistical correlation coeffcient of 0.6.
The relationship between the WTI spot price and inven-
tory levels also behaves in the expected manner—up until
about the end of 2004, the beginning of the case study
under discussion. Generally speaking, all else equal, spot
prices should increase when crude oil inventory declines,
because supply becomes more constrained in the short
run. Conversely, spot prices should decline when crude
oil inventory increases. That pattern generally holds in
Chart 16. From 1986 through 2004, the spot price and
inventory levels register a statistical correlation of -0.67.
From 2005 forward, the coeffcient shifts to +0.2.
Most importantly for the case study, notice that the
futures market moves into contango from the start of
2005 through the summer of 2007. This period corre-
sponds to a large volume of new trading in the futures
market based on the development of new financial
products offered on Wall Street.
21
It also corresponds
with a sustained increase in the spot price. This corre-
spondence explains why so many commentators claimed
that “speculators” drove the price increase.
Yet the price continued to escalate after the market
shifted into backwardation. True, inventory levels
decreased which suggests that the spot price should
rise. However, the inventory levels remained well within
21 Philip K. Verleger, Jr., “The Role of Speculators in Setting the Price of Oil,” Testimony before the U.S. Commodities Futures Trad-
ing Commission, August 5, 2009.
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PADD 2 Stocks U.S. Stocks less PADD 2 OECD Stocks less PADD 2
Chart 17
Relative Volatility of Select Regional Crude Oil Stock Levels
Source: U.S. Energy Information Administration
23
the range refected in Chart 16, when prices were much
lower.
Chart 17 provides an additional perspective on crude oil
inventories. PADD 2 inventories show much more vola-
tility than the rest of the United States, and much more
volatility still with respect to the entire OECD. PADD
2 is somewhat unique in that it is the delivery point for
WTI futures contracts. Although Chart 10 showed that
different crude oils tend to move together—and that
benchmark crudes can be expected to lead the price
movements, total inventories should matter for global
supply. Plus, Brent is traded (and delivered) in Europe.
Recall from the above discussion on supply that OPEC
countries had had success in managing global inventories
with its pricing policies. In that context, OECD inven-
tory levels were quite stable during the price escalation,
which is among the reasons that many commentators
dismiss the speculator-did-it story. Professor James
L. Smith captured this viewpoint (and summarizes the
arguments made above): “The only avenue by which
speculative trading might raise spot prices is if it incites
participants in the physical market to hold oil off the
market—either by amassing large inventories or by shut-
ting in production. If participants in the physical market
are convinced by speculative trading in the futures market
that spot prices will soon rise, their reaction could cause
inventories to rise and/or production to fall. However,
neither phenomenon was observed during the recent
price spike.”
22
IMPORTANT DETAILS RELATED TO OIL DEMAND
Philip K. Verleger, Jr., a highly accomplished petroleum
economist, has developed a compelling, well-docu-
mented narrative explaining the rapid 2006-2008 oil price
increase.
23
He argues that the primary catalyst came from
the implementation of ultra-low-sulfur diesel fuel regula-
tions in the United States and Europe. Understanding
his arguments—and understanding price volatility, in
general—frst requires understanding a few economic
prerequisites related to petroleum demand.
The demand for oil is a derived demand. End-consumers
demand refned petroleum products not crude oil per
se. The demand for these products works backwards
through the refning industry to the producers of crude.
Consequently, an underappreciated fact of the petroleum
market is that the prices of petroleum products (like
gasoline, diesel fuel, or jet fuel) generally determine the
price of crude oil(s), not vice versa.
24
The interaction
of supply and demand determines market prices. But
supply follows demand. Oil refners continually assess
consumer demand for refned product and then seek
to procure oil at a price low enough to generate a suf-
fcient proft.
This observation has general importance for understand-
ing oil prices—and has a particular importance for the
2006 to 2008 oil price spike shown in Chart 12. The
general importance relates to what economists refer to
as the (1) income elasticity of demand and (2) the price
elasticity of demand. The particular importance relates
to how refners had to respond to particular environmen-
tal regulations (and how the response interacted with the
price elasticities of supply and demand).
Income elasticity of demand relates to the responsive-
ness of a change in demand resulting from a change in
income; specifcally, it calculates the percentage change in
demand that results from a one percentage point change
in income. In the context of this report, this metric
helps explain the price-increase story told by Charts 11,
Chart 12, and Chart 13. Research shows that the income
elasticity of petroleum-related products hovers around
a value of one, meaning that a one percent increase in
income results in a one percent increase in the demand
for petroleum products (and thus oil). However, in
recent decades, the income elasticity appears much higher
(more responsive) in developing countries compared to
developed countries.
25
This fnding helps explain the
22 James L. Smith, “World Oil: Market or Mayhem?” Journal of Economic Perspectives, Vol. 23, No. 3, 2009, p. 159.
23 This section draws liberally from three works: Philip K. Verleger, Jr., “Anatomy of the 10-Year Cycle in Crude Oil Prices,” March
2009; Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” Business Economics, Vol. 46, No. 2, April 2011, pp.
71-82; Philip K. Verleger, Jr., “Rising Crude Oil Prices: The Link to Environmental Regulations,” Business Economics, Vol. 46,
No. 4, September 2011, p. 240-248.
24 Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” Business Economics, Vol. 46, No. 2, April 2011, p. 78.
24
relative growth differences in oil consumption by the
OECD and non-OECD countries illustrated in Chart 13.
The price elasticity of demand shares all of the same
defnitional characteristics as the price elasticity of sup-
ply (discussed above)—except that there is an inverse
relationship between price and quantity demanded.
The so-called law of demand states that, all else equal,
end-consumers will decrease the quantity demanded
of petroleum products—and thus oil—as the price
increases (and vice versa). Like the elasticity of supply,
the quantity demanded for specifc petroleum produces
tends to be much more inelastic (unresponsive to price)
in the short run than the long run. In the long run,
consumers have much more opportunity to alter their
overall consumption behavior.
Income elasticity tends to be much more important than
price elasticity in determining the quantity demanded
for petroleum products.
26
However, the relative inelas-
ticity of both demand and supply for petroleum works
together in important ways in the context of price
volatility. For example, a short run price elasticity of
demand for petroleum of -0.065 would be consistent
with the fndings of current research.
27
That means a
one percent increase (decrease) in price would result in a
0.065 percent decrease (increase) in quantity demanded.
Making an assumption that the elasticity of supply has
the same measured value of 0.065, implies the following
equation to calculate the price increase required to make
demand and supply balance in the context of a shock to
oil supply—say the loss of one percent of world supply
(or, for example, the equivalent of about 20 percent of
the supply that comes from Iran):
From the price forecasting example above, recall that the
December 2011 Kansas wellhead price of oil was $89.53.
A price increase of 7.7 percent would amount to $6.89
per barrel. If the oil shock amounted to fve percent
of supply—or roughly all of Iran’s production—the
price increase would be 5 x 7.7% = 38.5%, or $34.47
per barrel. The point: inelasticity makes small percent-
age changes in supply result in much larger percentage
changes in price—explaining how price volatility can
result from market fundamentals without the need to
blame “speculators.”
ENVIRONMENTAL REGULATIONS: AN EXPLANATION
OF THE PRICE SPIKE OF 2006-2008
The discussions above related to supply and demand
prepare the reader for Philip Verleger’s explanation for
the price spike of 2006-2008. It provides a case study
in the complex global dynamics that drive oil prices. He
summarizes his analysis by arguing that “the determina-
tion of oil prices depends not only on the demand level
but also on the mix of crudes, the industry’s capacity to
process the crudes, and the decisions by oil-exporting
nations on the volume of sour crude produced.”
28
The following points summarize Verleger’s logic in more
detail:
• The marginal buyer in the marginal market sets
the price for petroleum products and therefore
the price of crude oil. Conceptually, the mar-
ginal demander in a market is that entity bidding
for the last barrel available and the marginal
supplier in a market is the entity fulflling that
demand (at a price suffcient to cover all of
the economic costs involved). Identifying the
marginal actors in the market at any given point
in time presents a challenge, particularly on the
demand side. Often, the high-cost suppliers act
as the marginal supplier because the marketplace
has exhausted the less costly alternative sources
of supply. However, the marginal supplier could
be the supplier with excess production capacity.
25 See the references in James D. Hamilton, “Understanding Crude Oil Prices,” The Energy Journal, Vol. 30, No. 2, 2009, p. 190.
26 Louis H. Ederington, Chitru S. Fernando, Thomas K. Lee, Scott C. Linn, and Anthony D. May, “Factors Infuencing Oil
Prices: A Survey of the Current State of Knowledge in the Context of the 2007-08 Oil Price Volatility,” August 2011, p. 8.
http://205.254.135.24/fnance/markets/reports_presentations/factors_infuencing_oil_prices.pdf
27 Hamilton, “Understanding Crude Oil Prices,” p. 190.
28 Philip K. Verlerger, Jr., “Rising Crude Oil Prices: The Link to Environmental Regulations,” p. 245.
25
Verleger argues that, with regard to transporta-
tion fuel, the United States is the marginal mar-
ket for gasoline, Europe is the marginal market
for diesel fuel, and Asia is probably the marginal
market for jet fuel.
29
Each of these competing
demands for different “cuts” of refned crude
oil infuences the market price—at the mar-
gin—for a given barrel of crude oil. As Verleger
says: “Generally, the product in shortest supply
in the market most dependent on imports [the
high-cost source of supply] will effectively set
prices globally.”
30
• Crude oils from around the world have different
chemical properties. For purposes of Verleger’s
narrative, but oversimplifed in reality, the world
produces two types of crude oil: light-sweet
and heavy-sour. The light-heavy continuum
relates to the density of the oil, or how easily it
fows. Light crude fows more easily because
it has a higher concentration of fuel-grade
hydrocarbons, which, in turn, makes it yield
more end-consumer products with less pro-
cessing. The sweet-sour continuum relates to
sulfur (sour) content. As discussed above, two
key benchmark crudes for the futures market
are West Texas Intermediate and Brent, both
of which have light-sweet characteristics. Oil
from OPEC countries tends to have heavy-sour
characteristics, which trades at a price discount
to light-sweet crudes.
Despite the different chemical properties, dif-
ferent crude oils compete in highly-competitive,
integrated markets—which establish on-going,
but fuctuating, price differentials among the
different crudes. However, OPEC, as discussed
above, has pricing power and can administra-
tively restrain the price differential between
light-sweet and heavy-sour crudes that might
arise in the context of a more competitive
market structure. OPEC, and especially Saudi
Arabia, in effect, has the ability to position itself
as the marginal source of supply, and set price
discounts relative to the actively traded WTI and
Brent crude oils.
• These differences in crude oil characteristics
matter to oil refners from a processing per-
spective. Different crudes produce different
proportions of end-products depending on
the amount and type of processing required.
Refners have a deep understanding of these
differences and bid for crude oil from produc-
ers based on the expected product prices they
can proftably charge end-consumers for the
different petroleum products. That is why,
ultimately, the direction of causality for crude
oil prices runs from end-use demand to crude
oil, not vice versa.
Table 4
Comparison of Refnery Distillation Yields and
Other Characteristics
Nigerian Saudi Arabian
Type of Product Bonny Light Arab Heavy
LPR (%) 0.9 2.8
Light Gasoline (%) 4.3 0
Light Naphtha (%) 13.4 6.7
Intermediate Naphtha (%) 0 8.7
Heavy Naphtha (%) 10.1 0
Kerosene (%) 13.3 7.0
Gasoil (%) 22.7 12.5
Intermediate Gasoil (%) 0 9.7
Residual Fuel Oil (%) 39.1 52.6
Sulfur Content Residual Fuel Oil (%) 0.3 4.1
Sulfur (Kilos per Barrel) 0.2 4.1
Total Gasoil Potential (%) 36.0 29.2
Source: EIG, International Crude Oil Handbook, 2010. Repro-
duced from: Philip K. Verleger, Jr., “Rising Crude Oil Prices: The
Link to Environmental Regulations,” Business Economics, Vol. 46,
No. 4, September 2011, p. 244.
Table 4 provides a snapshot of the relevant
refning chemistry. It compares the distillation
(refnery) yields of two crudes: so-called Bonny
Light crude oil from Nigeria, which is among
the lightest, sweetest crudes, and so-called Arab
Heavy from Saudi Arabia. Refneries not well
equipped to process heavy-sour crudes can pro-
duce much more diesel-type fuels (those Table
4 items in bold text) from Bonny Light. Just
as importantly, the amount of sulfur refners
must remove from Bonny Light is much lower
29 Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” Business Economics, Vol. 46, No. 2, April 2011, p. 72.
30 Ibid.
26
than from Arab Heavy—making it much less
expensive to meet the ultra-low-sulfur diesel fuel
regulations implemented in the United States
and Europe.
Not all refners have equal capacity to refne all
crude oils with equal effciency of outcome. For
example, refners must build the expensive engi-
neering processes required to effciently process
heavy crude oils and remove sulfur from refned
products. Furthermore, the physical location of
refneries with different processing capabilities
matters in the price-setting process. Physical
volumes depend on physical processing capac-
ity and transportation, and the cost structures
related to both.
• European consumers—helped along by public
policy incentives—have gradually shifted from
gasoline to diesel as a preferred transporta-
tion fuel. About 75 percent of vehicles sold
in Europe have diesel engines. Europe is the
marginal market for diesel fuel. (Verleger argues
that this status—and the higher demand for
light-sweet crudes that it implies—explains the
divergence in the Brent-WTI spread discussed
in the context of Chart 10.)
• In 2000 and 2003, the United States and Europe,
respectively, implemented ultra-low-diesel fuel
regulations that became binding in June 2006
and January 2009. According to Verleger:
“European refners did not respond to this situ-
ation by adding capacity to produce more diesel.
Instead, they shut down facilities.”
31
Europe had
to import the diesel that it could not produce
itself. Much of the imported supply came from
the United States (because U.S. end-consumers
had begun to substitute natural gas for distil-
late fuel oil). Furthermore, Europe’s position
as the marginal market meant that the marginal
demand for diesel was denominated in Euros,
which traded at a premium to dollars, thereby
bidding up the dollar price of diesel (by about
16 percent, according to Verleger).
• The implementation of the ultra-low-sulfur-
diesel rules increased the demand for the world’s
sweet crudes, which represent a fraction of
world supply. At the same time, (1) the civil
conficts in Nigeria had reduced the produc-
tion volumes of its Bonny Light (a key source
of light-sweet supply) and (2) the United States
chose to add to its Strategic Petroleum Reserves,
removing even more sweet crude from the mar-
ket. (At this point it is important to recall the
discussion above about the magnifying infuence
on oil prices that results from inelastic demand
and supply. The margins of the market during
the 2006-2008 episode resulted from inelastic
demand for diesel fuel produced from tight
supplies of light-sweet crude, which accounts
for a fraction—about 40 percent or less—of
world crude production.)
The pricing policies of OPEC countries (dis-
cussed above in the section on supply) amplifed
the oil-supply constraints. Recall that OPEC
producers administratively set price differentials
for their crude based on the price of benchmark
crudes (which tend to be lighter and sweeter).
“The resulting prices,” argues Verleger, “bear
no relationship to what would prevail in a free
market.”
32
Charts 11 and Chart 13 clearly show
the slow-down in the rate of OECD crude
oil consumption—and the concurrent slow-
down in crude oil production—resulting from
OPEC’s artifcially-high price for heavy-sour
crude relative to light-sweet crude.
• Several factors contributed to the sharp drop
in price from 2008 to 2009: the 2007 recession
reduced consumption in OECD countries (see
Chart 13); the U.S. Congress forced the Depart-
ment of Energy to stop flling the Strategic
Petroleum Reserve, thereby releasing supply;
the Euro dropped against the dollar, thereby
31 Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” p. 75.
32 Philip K. Verlerger, Jr., “Rising Crude Oil Prices: The Link to Environmental Regulations,” p. 245.
27
dropping dollar-denominated prices for oil; new
Gulf of Mexico sources for light-sweet crude
came on line; and refners responded to the high
price of diesel by changing operation in a way
that increased supply.
THE CO-MOVEMENT OF OIL AND NATURAL GAS
PRICES
The physical attributes of natural gas—its gaseous
nature—makes it a geologically and commercially dis-
tinct product from oil. Natural gas can be liquefed,
but that process is expensive. So the piping and storage
infrastructure required to bring natural gas from the
wellhead to the end consumer tends to give it a regional-
market character from a supply and demand perspective,
as opposed to the globally-integrated market character
of oil.
That said, however, the natural gas infrastructure in the
United States is at a mature stage—with many regional
inter-connections. One recent investigation identifed
eight regional markets for natural gas (from a price-
setting perspective) and concluded that “the Canadian
and U.S. natural gas market is a single highly integrated
market.”
33
This market integration, the investigating
economists argued, means that the 1970s deregulation
of the natural gas market worked. Price signals now do
the job of effciently allocating natural gas to its highest-
valued uses.
Domestic U.S. natural gas production accounts for
about 90 percent of U.S. consumption. The remainder
is mostly imported from Canada. (A small amount of
liquid natural gas is imported from a variety of countries
around the world.
34
) As with oil, the fundamentals of
supply and demand drive the price of natural gas.
33 Haesun Park, James W. Mjelde, and David A. Bessler, “Price Interactions and Discovery among Natural Gas Spot Markets in North
America,” Energy Policy, Vol. 36, 2008, p. 290.
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Kansas Crude Price (per Barrel) Natural Gas Spot Price (per Barrel of Oil Equivalent)
Chart 18
Prices for Kansas Crude and Natural Gas (per Barrel, 2010$)
Source: Independent Oil and Gas Service, Inc. (Red Top News)
28
Chart 18 offers one way to display the relative price
trends between oil and natural gas. It shows the price of
Kansas crude and the (Panhandle Eastern Pipeline) spot
price of natural gas on a barrel-of-oil-equivalent basis.
Note the much greater volatility of the natural gas price
series. Also note the obvious break in co-movement
between the two price series in January 2010 (as noted
above in connection with Chart 3). Many researchers
have argued that the co-movement began to weaken
many years before that.
The barrel-of-oil-equivalent price shown in Chart 18
hints at an important principle with regard to natural
gas and oil prices co-movements: residual fuel oil and
distillate fuel oil (both refned from oil) and natural gas
compete as alternative fuel sources in both a business-
input and residential-consumption context. The stability
of the substitution relationship will ultimately act as the
economic mechanism driving the stability of the price
co-movement relationship. As discussed above in the
context of oil prices, the marginal user’s perceived sub-
stitution opportunity reacts to—and thereby sets—the
market price differential between oil and natural gas.
Economists Stephen Brown and Mine Yücel have docu-
mented two rules-of-thumb used in the energy industry:
the 10-to-1 rule and the 6-to-1 rule.
35
The former tends
to hold up in certain historical circumstances. The lat-
ter roughly refects the energy content differences in a
barrel of oil and a natural gas barrel-of-oil equivalent.
Oil is typically priced by the barrel (42 gallons) and
natural gas is typically priced in units of 1,000 cubic
feet. The energy content of 5,800 cubic feet of natural
gas approximates the energy content in a barrel of oil
(and a barrel of distillate fuel oil); 6,287 cubic feet of
natural gas approximates the energy content in a barrel
of residual fuel oil—hence the general 6-to-1 price rule.
(Chart 18 makes use of this rule.) Neither of these two
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Chart 19
U.S. Monthly Natural Gas Consumption and Production
Source: U.S. Energy Information Administration
34 BP Statistical Review of World Energy, June 2011
35 Stephen P.A. Brown and Mine K. Yücel, “What Drives Natural Gas Prices?” The Energy Journal, Vol. 29, No. 2, 2008,
p. 45-60.
29
rules-of-thumb predicts natural gas prices with impres-
sive accuracy. The 10-to-1 rule tends to underestimate
the actual price and the 6-to-1 rule tends to overestimate
the actual price.
Another basic formula—the burner-tip parity rule—
offers a more sophisticated version of the 6-to-1 rule.
As discussed above in the context of oil prices, the price
of oil (and therefore its infuence on the price of natural
gas) runs from the end user of the fuel back to the well-
head. The demand is a derived demand, so the burner-tip
parity rule idea suggests that each consumer (primarily
industrial consumers) assesses the economics of using
competing fuels and picks the most cost-effective fuel.
The choice works its way back to the wellhead as a price
signal. The burner-tip parity rule produces a somewhat
tighter co-movement relationship between oil and natural
gas relative to the 10-to-1 or the 6-to-1 rule.
Each of the three rules, however, is imperfect—and each
completely breaks down in a manner consistent with
the break in the co-movement of oil prices and natural
gas prices shown in Chart 18. The imprecision occurs
because of the substantial amount of short-run volatility
in natural gas prices. The structural break occurs primar-
ily in connection with the recent surge in unconventional
(shale) natural gas production.
Chart 19 illustrates why the price of natural gas tends to
be much more volatile than the price of oil: high levels
of imperfectly-predictable seasonality-driven demand.
Almost all of the major consumption peaks come in
January—the prime heating season. Almost all of the
minor consumption peaks come in July—the prime
cooling season.
Two additional items punctuate the seasonality of
demand (consumption). First, the much wider swings
in consumption relative to production imply that natural
gas storage plays an important role in the logistics of the
physical market for natural gas. Storage acts as a mecha-
nism to buffer against unexpected demand, but storage
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)
Consumpton Producton
Chart 20
Trend in U.S. Natural Gas Consumption and Production
Source: U.S. Energy Information Administration
30
inventory levels infuence the supply and demand condi-
tions perceived by market participants, so these storage
conditions have an infuence on price. Second, random
weather events often punctuate the more predictable
patterns of seasonal cyclicality on both the consump-
tion and production side of the market. For example, a
cold spell in late spring can create a surge in demand or
a storm in the Gulf of Mexico can temporarily disrupt
supply. Either event would put upward pressure on
natural gas prices in a manner that might deviate from
contemporaneous oil price movements.
The preponderance of current evidence suggests that
natural gas prices adjust to oil prices. The economics
related to fuel substitution, even though such substitu-
tion operates on a continuum of end-user choices, cre-
ates a relatively stable long-run pattern of co-movement
between oil prices and natural gas prices. Yet, many
subtleties and complexities in the market for natural gas
can generate wide divergence in a short-run context.
36
The strong break in the oil-natural gas price-link shown
in Chart 18 may also have a shorter-run interpretation—
although one different in character from a weather event
or storage imbalance. This report has marked the break
as 2010; other researchers have argued for 2006. Chart
19 provides some support for the early date. Note the
trend of increasing production relative to consumption
beginning about 2006. This date is consistent with the
increasing momentum behind shale gas production—
and other horizontal drilling projects.
Chart 20 provides a more vivid year-over-year illustra-
tion of the trends shown in Chart 19. Gas production
has clearly surged relative to consumption. The surge in
supply offers a clear explanation for the declining trend
in natural gas prices, in absolute terms and relative to
oil prices.
Such price collapses have occurred in past oil or gas
booms—and they are not sustainable. Dynamics on
both the demand side and the supply side will ultimately
drive natural gas prices back toward their historic, long-
run relationship with oil prices. First, on the supply side,
despite the popular excitement over the new technolo-
gies for extracting shale gas, producers have lost a lot
of money as the result of the price collapse for natural
gas (the core entrepreneurial risk framing this discus-
sion).
37
Consequently, gas producers will keep their gas
in the ground if they can and will postpone new gas
projects. Producers have turned their focus to using the
new horizontal-drilling technologies for producing oil.
The greater production of oil relative to natural gas will
help bring the two price series back into line with long-
run economics. Second, the low natural gas prices will
motivate an increase in the quantity demanded relative
to future supplies. The higher quantity demanded for
natural gas relative to refned petroleum fuels will help
bring the two price series back into line with long-run
economics.
Entrepreneurial Cost
Control through the
Business of Science and
Engineering
The National Science Foundation categorizes “oil and
gas extraction” among the most high-tech businesses
in the world.
38
As with many industrial pursuits, the
oil and gas industry has always fused together science,
engineering, and proft-seeking commerce. Each com-
ponent helps reinforce the other. The interactions drive
productivity: the quest to create ever-greater economic
value with ever-fewer resources used in the process. As a
general matter, given the price-taking posture of most oil
and gas producers, much of the entrepreneurial energy
must focus on cost control—with technology acting as
a key enabling tool.
36 In addition to Brown and Yücel, see: Peter R. Hartley, Kenneth B. Medlock III, and Jennifer E. Rosthal, “The Relationship of
Natural Gas to Oil Prices,” The Energy Journal, Vol. 29, No. 3, 2008; and David J. Ramberg and John E. Parsons, “The Weak Ties
Between Natural Gas and Oil Prices,” Center for Energy and Environmental Policy Research, Massachusetts Institute of Technol-
ogy, November 2010.
37 As Rex Tillerson, Chairman and CEO of Exxon-Mobil, said in June 2012: “We are all losing our shirts today.” http://www.
cfr.org/united-states/new-north-american-energy-paradigm-reshaping-future/p28630; also see: http://www.zerohedge.com/
contributed/2012-06-04/capital-destruction-natural-gas
38 Science and Engineering Indicators, Table 8-48. http://www.nsf.gov/statistics/seind08/tables.htm.
31
The geological science related to oil and gas is a fascinat-
ing subject that is beyond the scope of this report, except
to the extent one understands the enormous challenge
and cost associated with fnding commercially productive
reservoirs. Oil and gas result as a by-product of organic
and geologic processes. The creation of (conventional)
pools of oil and gas followed from a sequence of random
events that generate the necessary and suffcient condi-
tions. Research shows that about 2 percent of organic
matter dispersed in permeable rocks becomes petroleum.
About one-quarter of such matter will accumulate in a
reservoir that has commercial potential.
39
Convention-
ally (prior to advances in horizontal drilling), oil and gas
explorers had to fnd the places under the earth in which
rock formations trapped oil and gas in economically
“suffcient” quantities that fowed at “satisfactory” rates.
Undertaking the expense of drilling a well presents the
only way to confrm these conditions. Consequently,
discovering ways to minimize dry holes and maximize
the information derived from every well drilled motivated
the innovation process.
THE TECHNOLOGY OF THE UPSTREAM SECTOR
Chart 21 summarizes the annual production history of
oil and gas in Kansas, annotated by the dates of key
technological advances in rough approximation to when
Kansas producers began to apply them. Exploration and
technological advancement move through time together.
Recall from Chart 1 that Kansas producers, since the
1930s, drilled hundreds of oil and gas wells each year.
Consequently, the patterns of annual production do not
always show a stark reaction to the introduction of new
technologies. The process is symbiotic and evolutionary.
A chronology of key events in discovery, science, and
technological innovation follows:
40
39 Forest Grey, Petroleum Production for the Non-technical Person (Tulsa: PennWell Publishing Co., 1986), p. 27
40 The chronology draws liberally from: Daniel F. Merriam, “Advances in the Science and Technology of Finding and Producing Oil
in Kansas,” Oil-Industry History, Vol. 7, No. 1, 2006, pp. 29-46.
0
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Oil Producton Gas Producton
Rotary drilling
Seismic analysis
Core drilling
Wireline logging
Acidizing
Water ?ooding
3-D Sesimic
Tertary recovery
Relatonal databases
Hydro-fracking
Micro-seismics
Chart 21
Annual Production of Oil and Gas in Kansas, 1890-2011
Source: Kansas Geological Survey
32
1890—Nitroglycerin for well stimulation:
Early wells often needed stimulation to fow better. The
art of “shooting” a well involved using explosives to
stimulate the well. Shooters often picked nitroglycerin-
powered “torpedoes” to do the job.
1913—Surface structural mapping:
These maps resemble contour maps of the surface and
the boundary lines of important subsurface geological
features that give hints about where oil or gas might
reside.
1920s—Introduction of rotary drilling in Kansas:
Early drilling techniques (called cable-tool drilling) used
something like a heavy chisel on the end of a line. Rais-
ing and dropping the chisel-like drill bit smashed the rock
layers. The drilling crew had to periodically use another
string tool called a bailer to remove the smashed bits.
Certain situations may still call for this process.
The concept of rotary drills had existed for centuries.
An experiment with a rotary drill played a central role in
drilling the nation’s frst true gusher in 1901—the famous
well in Texas known as Spindletop. Rotary drills, though
more expensive to operate, can drill holes many times
faster than cable-tool drills. The circulating mud used
in the process also helps better control the integrity of
the well.
1923—Single-point seismic exploration and core
drilling:
A monument outside the Belle Isle Library in Oklahoma
City notes that in 1921 scientists in Oklahoma City
“confrmed the validity of the refection seismograph
method of prospecting for oil.” Originally, seismologists
set off a strategically-placed blast in a single location and
recorded with seismographs the vibrations that returned
from the subsurface. Since different subsurface strata
had different “echoes,” geologists could study the images
to identify structures in which oil or gas may accumulate.
0%
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20%
30%
40%
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60%
70%
80%
90%
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Oil Gas (including CBM) Dry Hole
Chart 22
Percentage of Kansas Wells Drilled by Type, 1910-2011
Source: Kansas Geological Survey
33
(Eventually, the technique evolved to collect over a hori-
zontal distance the data necessary to generate vertical
cross-section (2D) “pictures” of the subsurface.)
Core drilling uses specialized drill bits to extract samples
of the rock in a well. Geologists inspect the rock for
signs of hydrocarbons. They also use the cores to help
“map” the subsurface geology.
1930s—Wireline logging and acidizing:
Wireline logging refers to the lowering of measurement
instruments down the wellbore. The primary aim of
logging is to assess the characteristics of a well in prog-
ress. Certain measurements can help provide valuable
information about the viability of a well. The sooner
such information becomes known, the better from an
economic perspective.
Acidizing injects acids into the well to make certain
rock formations more permeable to improve the fow
of hydrocarbons.
1935—Secondary recovery and water fooding:
Secondary recovery via water fooding is a method to
extract additional hydrocarbons from a reservoir once
its “natural” production stops. Water is injected into
the reservoir from strategically placed wells. Properly
executed, the water will fush additional hydrocarbons
from the rock.
1950—Micro-seismics and hydraulic fracking:
Micro-seismic was devised as a means to locate the drill
bit in real time by using seismic waves generated by
the friction between the bit and the rock or sand being
drilled. This information aided the drilling process and
helped advance innovations related to directional drilling
and 3-dimensional imaging (especially in the context of
evaluating and controlling the fracture patterns in con-
nection with modern fracking techniques).
Hydraulic fracking pumps fuid and sand mixtures into
wells to crack the rock formations as a way to help
improve the fow of hydrocarbons into the wellbore.
The frst test of this method took place in the Hugoton
gas feld in Grant County, Kansas in 1947. The maturity
of the technique is partly responsible for the growth of
gas production that followed the introduction of this
technology.
Exhibit 3
Tertiary Oil Recovery
Source: http://www.co2storagesolutions.com/
34
1990s—3-D seismic enhanced (tertiary) oil recovery,
integrated petroleum databases, directional drilling,
modern hydraulic fracking:
Several technologies began to mature by the 1990s in a
mutually reinforcing way. Kansas producers began to
make a more determined use of them at about this time.
Beginning in the 1980s, 3-D seismic images improved on
the 2-D techniques.
41
3-D images provide far more detail
about the structure of the subsurface, which allows for
more informed drilling decisions. As a 2003 Kansas-ori-
ented study stated: “The estimated commercial success
rate for wells drilled with 3-D seismic is 70%, compared
to an average success rate of approximately 30%-35%
for wildcat wells drilled in Kansas over the past 3 years.
3-D seismic has been particularly useful for delineating
small structural highs and narrow channels that can be
signifcant drilling targets, but cannot be identifed with
well-control alone or even using 2-D seismic data.”
42
Chart 22, which is an alternative way to view the infor-
mation presented in Chart 1, documents that Kansas
producers have had increasing success rates with their
drilling activity since the mid-1960s. The implementation
of 3-D seismic reinforced the trend.
Tertiary oil recovery with CO
2
began as experiments in
the 1970s. Tertiary oil recovery has the same goal and
techniques as secondary recovery—except that gases
(like CO
2
or steam), chemicals, or microbes become an
added stimulant injected into the reservoir. The addi-
tional stimulants help lower the viscosity of the oil so
that it fows better. CO
2
does this job well.
(See Exhibit
3.) The development of 4D seismic has begun to com-
pliment tertiary recovery in mature felds. The fourth
dimension is time, which allows geologists to monitor
the fow patterns of specifc reservoirs so as to better
stimulate them.
43
Beginning in the 1980s, producers began to increase their
use of directional (horizontal) drilling techniques. The
concept and technology for directional drilling dated
back decades, but it did not become economic until
41 http://www.rri-seismic.com/Frame Pages/Tech Pages/Seismic/seismic.htm
42 Susan Nissen, et al. “3-D Seismic Applications by Independent Operators in Kansas,” Petroleum Technology Transfer Council,
January 2003, p. 1.
43 Ayyoub E. Heris, et al., “Study Integrates Flow Simulation, 4D,” The American Oil & Gas Reporter, July 25, 2012.
Exhibit 4
Key Elements of Modern Drilling Technology
Source: http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/ntrlgs/
prmrndrstndngshlgs2009/prmrndrstndngshlgs2009-eng.html
35
the 1980s. Directional drilling, which often produces a
smaller environmental footprint, may have several opera-
tional and economic advantages because it can mean
better production rates from fewer wells drilled. Kansas
producers have drilled, on average, a few horizontal wells
each year since 1990.
The advancement of computing technology has allowed
for improvement in all of the above technologies. In
Kansas, the advancement of computing technology has
also allowed the Kansas Geological Survey to develop
integrated databases for use by the independent produc-
ers of Kansas. The Robert F. Walters Digital Geological
Library, which resides in Wichita and is managed by the
Kansas Geological Society, makes available a vast reserve
of data related to oil and gas wells. The improved access
to information allows for better decision making.
Exhibit 4 allows for the visualization of three key ele-
ments of modern drilling processes that have made
“unconventional” sources of oil and gas commercially
viable. As discussed above, the various technologies had
been under development for decades. Their confuence
in the context of producing commercially viable shale
gas (and later, shale oil) dates to 1997 when Texas-based
Mitchell Energy (after years of research and develop-
ment partnerships with the Department of Energy, the
Gas Research Institute, and other private frms) drilled
a successful horizontal well in the Barnett Shale in the
vicinity of Fort Worth, Texas.
The top image in Exhibit 4 illustrates the fracking pro-
cess in both a vertical and a horizontal well. Directional-
drilling technologies enable the drilling of horizontal
wells. Some oil and gas rich geologic structures have a
vertical thickness of only a few dozen feet—but they can
cover a vast geographic area. Horizontal- drilling tech-
niques allow producers to tap into that vastness. Notice
the different colored zones in the image. Each one of
these zones may represent an isolated fracking process:
multi-stage fracking. Perfecting the multi-stage process
as a horizontal well bores ever deeper into a formation
represents one of the many advancements that enables
the success of the modern techniques.
The middle image in Exhibit 4 shows how a producer
might maximize production from a single well site by
strategically spacing many horizontal wellbores. Each
wellbore might be fracked.
The bottom image of Exhibit 4 shows a 3-D microseis-
mic image of a fracked horizontal well. This technology
allows for frack mapping. A seismic instrument is low-
ered into the wellbore, and the resulting seismic feedback
allows producers to see patterns of fractures in the rock
formation. Each color represents a different level of the
multi-stage fracking operations. This type of mapping
technology made the teams at Devon Energy (which had
acquired in 2002 Mitchell Energy, the pioneer in shale-
related horizontal fracking) realize the extent to which
horizontal drilling combined with multi-stage fracking
of each wellbore made all the difference for success.
44
THE BUSINESS OF THE UPSTREAM SECTOR
Exhibit 5 presents a schematic of the upstream oil and
gas sector. The front-end of the process involves an
iterative process of business negotiation and scientifc
investigation—an iterative process that (1) endeavors
to defne the economic prospects of a potential oil or
gas property and (2) creates a mutually-advantageous
contractual arrangement with regard to the consenting
parties who will share the actual costs and benefts related
to the prospect. Once the parties involved have made
a contract, the engineering processes related to drilling
proceeds. Of course, the engineering process is itself
an interlocking network of business arrangements. As
two industry experts have noted: “The world of petro-
leum is a world of contractors and subcontractors.”
45
Specialization abounds.
As detailed later in the report, on average, over the past
decade, Kansas has employed almost 14,000 private-
sector people in the upstream activities depicted in
Exhibit 5. Thousands of those counted represent single-
person businesses. Of the roughly 1,000 businesses with
employees, the average job count per business equals
eight. A large number of small, specialist enterprises
comprise the upstream business ecosystem in Kansas.
44 http://thebreakthrough.org/blog/2011/12/interview_with_dan_steward_for.shtml
45 Bill D. Berger and Kenneth E. Anderson, Modern Petroleum: A Basic Primer of the Industry, 3
rd
Edition (Tulsa: PennWell Publish-
ing Company, 1992), p. 118.
36
and extraction process. The owner(s) of the mineral
rights must cooperate in the extraction process. The
“landman” employed by an oil or gas company has the
duty to determine the ownership rights and manage the
negotiations among the various owners. With many
legal interests in play, the structure of negotiations can
become complicated.
Legal counselors to landowners usually advise them to
put legal agreements in place before allowing any type
of scientifc investigation to take place on their property.
Typically, in Kansas, landowners will secure a formal
lease contract before granting access to their land. The
lease gives the lessee the right to explore. The payments
made to the lessor under the contract, in part, compen-
sate them for any damage that might occur on the land
during the exploration process.
Geology and Geophysics
Geoscientists study subsurface materials, structures, and
processes using drill cuttings, gravity, magnetic, electrical,
and seismic methods. In brief, they try to scientifcally
determine where to drill and evaluate the volumes of
hydrocarbons that may exist in a particular drilling zone.
Economics
Reservoir engineers use the scientific information
compiled and analyzed by the geoscientists to develop
economic estimates related to drilling costs and projected
payoffs based on the estimated volume of recoverable oil
or gas. They also work with other experts to continually
assess and improve the cost-beneft equations related to
alternative drilling plans or methods. In brief, reservoir
engineers help make the decision about whether or not
to undertake the cost of drilling a well.
Legal & Contractual
Once the evaluation process has advanced far enough for
the relevant parties to make a decision to drill a well, legal
negotiations must take place related to how the surface
rights owner will be accommodated and compensated
during the production process and the owner(s) of the
mineral rights, via a lease contract, will share in whatever
economic gain results from the well. The mineral lease
has several components:
46
Exhibit 5
A Sketch of the Upstream Oil & Gas Industry
Landowner
In the United States, the landowner(s) holds a prominent
place because he or she has the legal property rights to
the oil and gas. However, the legal rights can be split
between (a) the surface rights to use of the land and
(b) the mineral rights to use of the land. Often the
same person or legal entity owns both rights. Each set
of rights may also be split in fractional shares among
many different persons or legal entities. The owner(s)
of the surface rights must cooperate in the exploration
37
• Bonus payment—an up-front payment for sign-
ing the lease, often negotiated as a fxed dollar
per acre.
• Royalties—a share of the proceeds from pro-
ducing and selling the oil or natural gas.
• Time limits related to how long a lessee can
explore and drill, along with specifc defnitions
related to exploration, drilling, and quantities
produced.
• Directives related to the protection and proper
stewardship of the minerals.
• Penalty clauses.
• Pooling clauses that allow oil and gas com-
panies to form partnership agreements with
other leaseholders in a geographic area for the
purpose of improving the cost-effectiveness
of operations.
• Clauses related to operating restrictions and
satisfactory performance.
Oil and gas companies that initiate a project (by acquir-
ing a lease) often try to spread their risk by selling
fractional interests to other investors. The contractual
arrangements make explicit how the parties will share
the costs and revenues. Royalty interests differ from
mineral interests.
SITE PREPARATION, WELL DRILLING, AND WELL
COMPLETION
As already mentioned, the upstream oil and gas business
represents an interlocking network of contractors and
subcontractors. All of the high-tech elements related
to oil and gas extraction represent professional special-
ties. Entire businesses may specialize in one part of the
intricate overall process.
Chart 23 shows that, on average, since 1997, Kansas has
more than 60 drilling rigs operating. Since 2004, the
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Chart 23
U.S. and Kansas Count of Active Drilling Rigs
Source: Independent Oil and Gas Service, Inc. (Red Top News); U.S. count from Baker-Hughes
46 Berger and Anderson, Chp. 4.
38
time of a general escalation in oil prices, the average has
exceeded 85 rigs per month. The trend in Kansas rigs in
operation matches closely the U.S. trend. As discussed in
detail above, global oil markets have a tight integration;
all producers respond to the same set of price signals.
The list below provides a cursory overview of the
semi-skilled and highly-skilled people involved with
drilling rigs, well completions, and on-going produc-
tion. According to data compiled by the Independent
Petroleum Association of America, among the produc-
ing states, Kansas typically ranks third or fourth in oil
wells drilled and seventh or eighth in natural gas wells
drilled. (See Chart 8.) All of the drilling activity has
established a pool of talent in Kansas that is broad and
deep. From a producer’s perspective, all operating costs
associated with employing these specialized people (and
well operations in general) are signifcant—and present
elements of entrepreneurial risk.
Petroleum engineers: Devise methods to improve oil
and gas extraction and production.
Rig operators: Set up or operate a variety of drills and
pumps to circulate mud through a drill hole.
Fluid engineers: Manage appropriate drilling fuid
specifcations for a drilling operation.
Wireline operators: Use of cabling technology to lower
equipment or measurement devices into a well.
Well loggers: Detailed recordkeeping (a well log) of the
geologic formations penetrated by a borehole.
Casing: Placement of pipe into a recently drilled sec-
tion of a borehole.
Cementing: Securing casing pipe with advanced
cementing techniques. Note that casing and cementing
protocols play an integral role in the structure of the
well—and work simultaneously to protect underground
water supplies, as shown in Exhibit 6. Not every well
follows each of the cementing steps shown in Exhibit
6—especially in Kansas. Conductor casing is used in a
low percentage of Kansas wells. Kansas producers also
rarely use intermediate casing. In Kansas, surface casing
is typically set to the depth necessary to protect fresh
water; on productive wells, production casing is set to the
Exhibit 6
Drill Casing and Cementing
well’s total depth and then cemented at the bottom of the
hole to case off zones that have productive potential and
at the top of the hole to protect “usable water” (water
that is not fresh enough to be used without treatment).
Perforating: Techniques used to create a hole in the
casing through the cement and into the rock forma-
tion to allow (and enhance) oil and gas to fow into the
completed well.
Stimulation: Specialized techniques used to improve
well fow or enhance oil and gas recovery, such as acidiz-
ing, fracking, swabbing, hot oiling, snubbing, and coil
tubing.
Acidizing: The use of hot hydrochloric acid to remove
substance build-up—like limestone, dolomite and calcite
cement—that can impede the fow of a well.
Fracking: The propagation of fractures in a rock layer
that results from injecting highly-pressurized fuid mix-
tures into a well.
39
Swabbing: Removal of liquids that were instrumental
to the drilling process but must be removed for proper
well operation. Specialists place a rubber plunge down
the well bore. The swab is then pulled back up towards
the top of the well bore. As the swab moves up the well
the pressure below it is reduced and liquids are sucked
out behind it.
Hot Oiling: Circulation of heated fuid, typically oil, to
dissolve or dislodge paraffn deposits from the produc-
tion tubing. Such deposits tend to occur where a large
variation in temperature exists across the producing
system.
Snubbing: Also known as hydraulic workover, this
procedure involves forcing a string of pipe into the well
against wellbore pressure to perform the required tasks.
The rigup is larger than for coiled tubing and the pipe
more rigid.
Coil Tubing: Coiled tubing is used when producers
desire to pump liquids directly to the bottom of the well,
such as in a circulating operation or a chemical wash.
It can also be used for tasks normally done by wireline
if the deviation in the well is too severe for gravity to
lower the toolstring and circumstances prevent the use
of a wireline tractor.
Pumper: A pumper gauges (measures) the tanks daily,
performs routine maintenance, and reports any problems
that may arise to his superintendent.
Salt Water Disposal: Salt water produced by a well is
frequently hauled to a distant disposal well if a lease does
not have its own disposal facilities—or is not connected
to a nearby disposal well.
Miscellaneous Services: If a well doesn’t produce gas,
it is either served by a propane supplier or it is tied in
to an electrical system. Repairs to the engine or motor
powering the pumping unit periodically occur. Repairs
also occur to the pumping unit and tank battery. Wells
need to have their rods and tubing pulled periodically
to repair parts in the rod string or leaks in the tubing.
Plugging Wells: When a well’s production has declined
to the point where its production revenues will no longer
cover its operating costs, the well is said to have reached
its economic limit, even if the well may still have recover-
able oil or gas. At this point, a producer will most likely
choose to plug the well, remove the equipment, and
forfeit the leasehold interest. Any operator of a well
is ultimately responsible for plugging it. The Kansas
Corporation Commission will look to the most recent
operator frst; only when it cannot identify a potentially
responsible party will it designate a well as an “orphan
well” and plug it at the expense of the state government.
The fnancing for state-sponsored plugging of orphan
wells comes from two funds maintained by the Kansas
Corporation Commission. The primary contribution to
those funds, in turn, comes from the oil and gas industry
through (1) the conservation fee (production tax) and (2)
the fnancial assurance payments made when operators
renew their licenses. Additional funds come from the
Kansas Water Plan and from the state share of oil and
gas royalties on Federal lands. Kansas law also provides
for a $400,000 annual transfer from the State General
Fund (about 25 percent of the total). However, State
General Fund transfers have not occurred in recent
years.
47
HEALTH, SAFETY, AND ENVIRONMENTAL OVERSIGHT
The Kansas Corporation Commission (Conservation
Division) is the primary government agency charged with
regulating oil and gas activities in Kansas. The functions
of the Commission have grown signifcantly over time.
In the earliest days of the Kansas oil and gas industry,
before producers and consumers understood how to
steward the oil and gas resources properly, the Commis-
sion protected correlative rights (the rights to oil and gas
reserves underneath adjacent properties with different
owners) and promulgated rules to help prevent waste.
This focus resulted in well-spacing orders to protect
the rights of offsetting landowners and to prevent over
drilling. Another remedy involved rules related to “pro-
duction allowables,” or limits on the rate of production
from a given well.
In one way or another, the Kansas Corporation Com-
mission (in conjunction with federal regulators like the
Environmental Protection Agency and the Department
47 See K.S.A 55-192, K.S.A 55-193 and FY 2013 Governor’s Budget Report—Volume 1, p. 77.
40
of Labor’s Occupational Safety and Health Administra-
tion), oversees almost all of the steps and processes
related to producing oil and gas, as depicted in Exhibit
5. The Conservation Division of the Kansas Corpo-
ration Commission is staffed by professionals with
backgrounds in geology and law, and many of the pro-
fessionals have industry experience. The staff maintains
an open dialogue with industry through the Oil & Gas
Advisory Committee, which represents industry, land-
owners, and other interested parties. The Conservation
Division has a history of professionalism and of timely
responses to flings, which serve to adequately regulate
the industry without undue cost or delay. The Kansas
Corporation Commission has formal rules, procedures,
and (as appropriate) penalties related to:
• Notice of intention to drill.
• Classifcation of wells.
• Procedures for determining the location of
wells using global positioning system.
• Application for well spacing.
• New pool applications.
• Operator or contractor licenses.
• Assignment of allowables.
• Preservation of well samples, cores, and logs.
• Unlawful production.
• Prevention of waste, protection of correla-
tive rights, and prevention of discrimination
between pools.
• Well construction requirements.
• Well casing and cementing.
• Mechanical integrity requirements.
• Mechanical integrity testing.
• Tests of wells.
• Shut-off tests.
• Completion reports.
• Drilling through gas storage formations.
• Drilling through CO2 storage facility or CO2
enhanced oil recovery reservoirs.
• Dual or multiple-completed wells.
• Surface commingling of production.
• Vacuum and high volume pumps applications.
• Transfer of operator responsibility.
• Pollution prevention.
• Venting or faring of gas.
• Sensitive groundwater areas.
• Spill notifcation and clean-up.
• Disposal of hazardous materials.
• Leak detector inspections and testing.
• Reporting of leaks, potential leaks, or loss of
containment.
• Notice of intention to abandon a well.
• Temporarily abandoned wells.
• Plugging methods and procedures.
• Tank and truck identifcation.
• Documentation required for transportation
and storage.
• Storage facility requirements.
• Storage facility monitoring and reporting.
• Safety inspection and annual review of safety
plans.
• Temporary abandonment of a storage facility.
• Application for decommissioning and abandon-
ment of storage facility.
The growing use—and public awareness—of hydrau-
lic fracturing has raised public concerns related to its
potential to degrade water supplies. To protect fresh and
usable groundwater, the Kansas Corporation Commis-
sion has promulgated regulations dealing with the casing
of wells, cementing that casing, the use of surface pits
and the plugging of wells. Any spills of oil or salt water
are required to be reported to the Commission which
41
will provide guidance for cleanup activities. As most oil
and gas wells produce a certain amount of salt water
waste, the Commission has rules for its safe disposal into
non-usable water bearing geological formations and for
the testing of the mechanical integrity of the salt water
disposal wells. The casing and cementing rules serve to
protect water resources from both the disposal of waste
water and from hydraulic fracturing. Each operator must
be licensed by the Commission and is subject to fne or
revocation of license for acts of non-compliance.
Assessing the Future: How
“Unconventional” Oil and
Gas Plays May Contribute to
the Kansas Economy
The defnition of “unconventional” oil or gas systems
typically relates to their economics.
48
“Unconventional”
oil and gas plays cost more to develop than “conven-
tional” plays. That general, but not necessarily universal,
defnition explains why hydrocarbons trapped in shale
or coalbeds often qualify as unconventional oil or gas
resources. Historically, producers faced much higher
extraction costs for these resources (if they could indeed
actually extract them) than they did for oil or gas trapped
in, say, sandstone. Scientifc and technological advance-
ment may have lowered the production costs, but the
defnitional classifcations remain.
THE MISSISSIPPIAN LIME PLAY
The Mississippian Lime play in south central Kansas (and
perhaps much of western Kansas) fts into the “uncon-
ventional” category primarily because the horizontal-
drilling techniques being employed are the same ones
used to extract oil and gas from shale. Kansas producers
have extracted oil and gas from the Mississippian Lime
formation for decades using “conventional” techniques
(like basic vertical well drilling).
Nevertheless, because of the new techniques, the Mis-
sissippian Lime may yield a substantial amount of oil
and gas that more conventional techniques (seemingly)
could not access. That makes the play sit comfortably in
this report’s model of an industry defned by enduring
high-tech entrepreneurship.
The portfolio of horizontal-drilling technologies
discussed above resulted from the entrepreneurially
energies of a collection of Mid-Continent frms. The
earliest efforts of these entrepreneurs beneftted from
a shale gas research and development project in the
New England area initiated in the mid-1970s the then
newly-created Department of Energy. But the Mid-
Continent frms (with the early aid of a few risk-sharing
grants and technological assistance from government
agencies) conducted the trial-and-error work required to
make unconventional oil and gas sources commercially
viable. A 1997 well drilled by Mitchell Energy into the
Barnett Shale underneath the area of Fort Worth, Texas
typically marks the breakthrough point. Advances and
refnements continued thereafter.
The smaller, independent companies entrepreneurially
pursued the unconventional oil and gas sources for the
same primary economic reason smaller, independent
companies dominate Kansas production: The projected
profts on specifc projects do not rise to the dollar levels
required by larger companies.
Harvard researcher Clayton Christensen established this
general point in the work that led to his iconic book, The
Innovator’s Dilemma. He has summarized the point this
way: “One of the bittersweet results of success is that
as companies become large, they lose sight of small,
emerging markets.”
49
The major oil companies had the human and fnancial
capital to pursue and develop the disruptive technolo-
gies so-far discussed, but they did not have a compelling
fnancial incentive to pay attention. Most of the major
oil companies had their focus on fnding large, con-
ventional sources of oil and gas outside of the United
States (except for the Gulf of Mexico).
50
Rex Tillerson,
Chairman and CEO of Exxon-Mobil, speaking before
an audience associated with the Council on Foreign
48 B.E. Law and J.B. Curtis, “Introduction to Unconventional Petroleum Systems,” AAGP Bulletin, Vol. 86, No. 11, November 2002,
pp. 1851-1852.
49 Clayton M. Christensen and Michael Overdorf, “Meeting the Challenge of Disruptive Change,” Harvard Business Review, March-
April 2000, p. 70.
42
Relations, recently said: “And I would be less than honest
if I were to say to you, and we saw it all coming, because
we did not, quite frankly. We did recognize the potential
of the shale resources in North America. We recognized
there were technology solutions to a portion of that. We
grossly underestimated the capacity of both the rocks,
the capacity of the technology to release the hydrocar-
bon, natural gas from the shale gas and now oil from
tight oil rocks. We underestimated just how effective that
technology was going to be, and we also underestimated
how rapidly the deployment of that technology would
occur -- again, all in response to fairly high prices.”
51
With the technology and production potential proven,
Exxon-Mobil addressed its lack of foresight by acquiring
XTO Energy in 2010, in a deal valued at $41 billion.
52
The economic potential made possible by the new
technologies has brought a major oil company back to
Kansas. The Shell Oil Company recently purchased
large tracts of leased acreage in Kansas related to the
Mississippian Lime formation. Prior to this investment,
records from the Kansas Geological Survey indicate
that Shell Oil last completed a well in Kansas in 1984
(with most activity before that pre-dating 1950). Two
Oklahoma-based companies, Sandridge Energy and
Chesapeake Energy, have also leased large amounts of
acreage related to the Mississippian Lime play.
Map 2 indicates the approximate geography of the
Mississippian Lime (which extends down two-counties
deep into Oklahoma) and the Kansas counties that have
attracted the most intent-to-drill permits for horizontal
wells. Intent-to-drill represents a permitting process
not a guarantee to drill a well. Producers, as a matter of
operational planning, often register an intent-to-drill that
does not ultimately materialize as an actual well drilled.
The left-hand number shown in the select counties on
Map 2 indicates the count of intent-to-drill permits; the
right-hand number indicates the count of well comple-
tions. The counts represent permit and drilling activity
50 Verleger, “The Amazing Tale of U.S. Energy Independence,” p. 54.
51 http://www.cfr.org/united-states/new-north-american-energy-paradigm-reshaping-future/p28630
52 http://news.exxonmobil.com/press-release/exxon-mobil-corporation-and-xto-energy-inc-announce-agreement
Allen
Anderson
Atchison
Barton
Bourbon
Brown
Butler
Chase
Chautauqua
Cherokee
Clay
Cloud
Coffey
Crawford
Decatur
Dickinson
Doniphan
Douglas
Elk
Ellis
Ellsworth
Franklin
Geary
Graham
Grant
Greeley
Greenwood
Hamilton
Harvey
Jackson
Jefferson
Jewell
Johnson
Kearny
Labette
Leavenworth
Lincoln
Linn
Lyon
Marion
Marshall
Mcpherson
Miami
Mitchell
Montgomery
Morris
Morton
Nemaha
Neosho
Norton
Osage
Osborne
Ottawa
Phillips
Pottawatomie
Republic
Rice
Riley
Rooks
Russell
Saline
Seward
Shawnee
Sheridan
Smith
Stafford
Stanton
Stevens
Wabaunsee
Washington
Wilson
Woodson
Wyandotte
Barber
Cheyenne
Clark
Comanche
Cowley
Edwards
Finney
Ford
Gove
Gray
Harper
Haskell
Hodgeman
Kingman Kiowa
Lane
Logan
Meade
Ness
Pawnee
Pratt
Rawlins
Reno
Rush
Scott
Sedgwick
Sherman
Sumner
Thomas
Trego Wallace
Wichita
12/2
9/0
53/15 38/19 66/29 9/4
Map 2
Approximate Area of Interest Related to the Mississippian Lime Formation and Count of Horizontal Well
Permits vs. Wells Drilled (2010 through July 2012) in the Top-6 Counties
Source: Sandridge Energy, Public Presentation; Kansas Geological Survey
43
that took place from 2010 through July 2012. In that
time frame, Barber County (at 50 percent) experienced
the highest conversion rate from intent-to-drill to well-
drilled. Only time will tell if the conversion rates increase
from those reported on the map.
To further clarify, the fgures on Map 2 represent hori-
zontal wells only. The intent-to-drill horizontal versus
vertical wells is a relevant distinction separating the
Mississippian Lime play from the regular patterns of
exploration and production. Map 2 shows the number
of horizontal well permits from 2010 through July 2012
for the top-6 counties only: 187 out of a total of 260.
Most of the other permits, but not all, specifed coun-
ties in the Mississippian Lime zone on the map. Over
the same time period, however, the Kansas Corporation
Commission issued 20,958 intent-to-drill permits that did
not have a horizontal specifcation. The Mississippian
Lime play has stimulated interest and received attention
form the news media, but the independent producers of
Kansas continue to explore and drill in 92 of the state’s
105 counties. (Table B5 in Appendix B shows that inde-
pendent oil and gas producers, over the state’s history
have drilled 97 percent of the wells, produced 93 percent
of the oil, and produced 63 percent of the natural gas.)
Beginning in 2012, blog posts appeared comparing
the Mississippian play in Oklahoma and Kansas to the
Bakken shale play in North Dakota.
53
Such compari-
sons should consider several different perspectives and
caveats. The comparisons have two fundamental ele-
ments: (1) the potential growth of oil and gas related
jobs supported by drilling and production and (2) the
potential size of recoverable oil and gas reserves. The
potential drilling-and-production-related job growth, in
turn, has implications for the transportation and housing
infrastructure required to accommodate such growth.
To put the infrastructure issue in perspective, Chart 24
illustrates upstream (exploration, drilling, and drilling-
support services) job growth in select counties that have
experienced recent oil or gas “booms.” Chart 25 helps
provide further perspective by illustrating upstream jobs
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
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Weld, CO Williams, ND Lea, NM Uintah, UT Sweetwater, WY
Chart 24
Quarterly Upstream Job Count in Select “Boom” Counties
Source: U.S. Bureau of Labor Statistics
53 See, for example: http://seekingalpha.com/article/322155-investing-in-the-mississippi-lime-is-it-the-new-bakken
44
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Weld, CO Williams, ND Lea, NM Uintah, UT Sweetwater, WY
Chart 25
Upstream Jobs as a Share of Total Jobs (implied by Chart 1)
0% 0%
5% 5%
10% 10%
15% 15%
20% 20%
25% 25%
30% 30%
35% 35%
40% 40%
-1,000 -1,000
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Upstream Share of Total Upstream Share of Total Upstream Jobs Upstream Jobs Total Jobs Total Jobs
Chart 26
Quarterly Change of Upstream and Total Jobs (along with Upstream Job Share) in Williams County,
North Dakota
Source: U.S. Bureau of Labor Statistics
45
as a share of total jobs. Contrast Weld County, Colorado
with the other counties. Weld County had the upstream
job count and job growth of many of the other boom
counties, but the share of upstream jobs was much
smaller. Weld County hosts several sizable cities (Greeley
has a population of about 92,000) and is within close
driving proximity from the Denver metro area. This
type of context matters. The more remote counties
can expect to exhibit much more severe infrastructure
strain as part of the growth process. Proximity to larger
population centers can help ameliorate the strain—a
relevant point in the context of the Kansas portion of
the Mississippian Lime, since Oklahoma City, Tulsa, and
Wichita have close proximity to the current target coun-
ties shown on Map 2.
Notice that both the job counts and the job growth
illustrated in Chart 24 number in the thousands. Wil-
liams County, North Dakota (which has received most of
the recent news media attention) represents an extreme
case. It has exhibited explosive growth. And it has
experience noteworthy infrastructure strains as a result.
From 1997 to 2012, Williams County experienced 300
percent growth in its count of total jobs; two thirds of
that growth took place from 2010 to 2012. At the begin-
ning of this growth phase, offcials estimated the need to
build homes for 23,000 new permanent residents—and
the utility infrastructure required to service those homes.
Before the boom, this area of North Dakota typically
experienced at most a few dozen housing starts per year.
54
Chart 26 illustrates the quarter-over-quarter progression
of the growth phenomenon in Williams County, North
Dakota. It also reveals some of the growth dynamics
related to upstream jobs and total jobs. The steady net
growth in upstream jobs eventually triggered enough
critical mass to support the growth of a large number
of other jobs. To put the Williams County growth
into context, consider that, on average, over the period
from 1998 to 2010, Kansas has supported about 7,000
upstream jobs. The upstream job growth in Williams
County represents the equivalent of the entire Kansas
upstream job base rapidly converging on a relatively
rural Kansas county like Dickenson County, Seward
County, or Sumner County. So far, no evidence indicates
that Kansas will experience job count numbers of this
magnitude.
The Mississippian Lime activity in Oklahoma offers per-
haps the best evidence for setting expectations in Kansas.
Essentially, nine counties in north central Oklahoma
encompass the Mississippian Lime formation. Table 5
reports the number of horizontal wells drilled in those
counties from 2009 through June of 2012. Note that
the Oklahoma counties registering the highest count
of well completions: Woods, Alfalfa, and Grant, are,
respectively, roughly contiguous to the Kansas counties
of Comanche, Barber, and Harper, the counties on Map
2 registering the most interest.
Table 5
Horizontal Wells Completed in Oklahoma
Mississippian Lime Counties
County 2009 2010 2011 2012*
Alfalfa 1 18 91 70
Gar?eld 2 3 12 5
Grant 0 2 58 42
Kay 1 4 6 4
Major 1 0 0 0
Noble 0 0 5 4
Pawnee 0 1 2 1
Payne 3 5 9 12
Woods 13 30 40 62
Total 21 63 223 200
*Through June of 2012
Source: Oklahoma Corporation Commission
Two companies dominate the production activity implied
by Table 5: Chesapeake Energy and Sandridge Energy.
These companies accounted for more than 98 percent
of the horizontal well completions in Alfalfa and Woods;
with Sandridge completing at least 70 percent of the
wells in Alfalfa and Chesapeake completing at least 75
percent of the wells in Woods. Sandridge accounted
for at least 85 percent of the wells completed in Grant
County.
The price of oil or gas drives drilling. Oil and gas prices
collapsed in 2008. Oil prices bottomed-out in 2009 and
began to escalate rapidly. Gas prices remained near post-
collapse levels. (See Chart 3.) The favorable trend in oil
prices helps explain the upward trend in number of wells
drilled shown in Table 5—and why a Sandridge executive
has made public statements suggesting that the company
54 Danny Boyd, “Oil Boom Creates Infrastructure Needs,” The American Oil and Gas Reporter, February 2011.
46
may drill as many as 200 wells in Kansas in 2013.
55
Of
course, as all veterans of the oil and gas industry know,
favorable price trends can quickly turn unfavorable.
THE POTENTIAL FOR INFRASTRUCTURE STRAINS IN
KANSAS
The drilling operations in the Mississippian Lime play
will likely put strains on infrastructure in rural Kansas.
In other states, the infrastructure strain from increased
horizontal drilling activity has come in two general
forms: truck traffc and housing for upstream workers.
The truck traffc is unavoidable and will be a function
of drilling requirements and the rate at which producers
drill wells. The issue of housing accommodations for
upstream workers carries more uncertainty; the Kansas
locations currently attracting interest from producers
with plans to drill horizontal wells are rural but not nec-
essarily desolate. Commuting from urban areas offers
options.
Truck traffc has placed a signifcant burden on the rural
roads in North Dakota and certain counties in Texas
(related to the Eagle Ford Shale). For example, in North
Dakota, each well requires approximately 1,000 truck
trips to the well and 1,000 truck trips from the well.
56
The well-drilling activity in Kansas could match those
truck numbers for several years. The Mississippian Lime
is much more shallow and easier to hydraulically fracture
than the Bakken Shale and Eagle Ford Shale. However,
the Mississippian Lime produces much more salt water
than the shale formations. In the case of shale, pro-
ducers truck water in; in the case of the Mississippian,
producers will likely truck water out—until they become
confdent enough with the particulars of the Mississip-
pian’s production potential to invest in water-related
pipeline or disposal-well infrastructure. (However, the
CEO of Sandridge Energy has made public statements
expressing that company’s intention to develop salt water
disposal systems ahead of the drilling program, and
thereby eliminate or mitigate the need for trucking salt
water: “The mystery of the play that was unlocked . .
55 Dan Voorhis, “Oil Exec: SandRidge Finding Increasing Success in Horizontal Drilling in Kansas,” Wichita Eagle, August 20, 1012.
http://www.kansas.com/2012/08/20/2456786/oil-exec-sandridge-fnding-increasing.html
56 Danny Boyd, “Oil Boom Creates Infrastructure Needs,” p. 2.
57 Dan Voorhis, “2012 May Reveal Future for Oil in Kansas, Wichita Eagle, March 5, 2012.
http://www.kansas.com/2012/02/24/2224606/2012-may-reveal-future-for-oil.html
. is that high enough oil prices and drilling a horizontal
well that can get enough volume can make money, can
have a rate of return. If you have the belief that you can
move 3,000 barrels of water a day and get 200 or 300
barrels of oil with it, and do that over a large area, you’d
be inclined to go ahead and spend the tens of millions
of dollars up front for a water disposal system.”
57
)
The outlook for the Mississippian Lime play remains
uncertain. Success in the Mississippian Lime could lead
to hundreds of horizontal wells being drilled each year.
But “success” is the operative word.
Disappointing exploration outcomes and shifting eco-
nomic conditions are an inherent part of the model of
high-tech entrepreneurship that characterizes the oil
and gas industry. The current explorations in Kansas
could disappoint with regard to recoverable oil and gas.
Alternatively, the economics of the Mississippian Lime
play could change—either in absolute terms (because
of, say, a collapse in prices) or in relative terms (because
of, say, new plays in other locations with better expected
investment returns). The economics matter somewhat
more in the Mississippian Lime context than in other
shale plays around the country because three compa-
nies hold most of the leases related to the Mississippian
Lime play; the turnover of activity related to alternative
resource-allocation decisions that these three leasehold-
ers might make could be much slower than in regions
with dozens of leaseholders and production companies
(like the Bakken or Eagle Ford Shale regions).
The “baseline” production scenario described below
assumes “success,” and defnes it in a particular way:
the average number of horizontal wells drilled per quarter
begins at 75 and grows to 300 over a 10-year period. If
all of that activity happened to take place in, say, two
counties instead of several counties, the road infra-
structure in the two counties could experience between
150,000 and 600,000 more truck trips than otherwise.
Even if the drilling activity becomes much more dis-
persed, certain road corridors could act as primary traffc
47
ways. (In the most optimistic scenario contemplated
below, the number of wells could increase by 114 percent
over the baseline scenario, implying between 320,000 and
1,280,000 more truck trips than otherwise.)
Insuffcient housing accommodations have placed stress
on municipal government resources in North Dakota
and Wyoming. First, upstream activity in both these
states required the creation of “man camps,” which can
lead to increased demand for local government services,
especially emergency responders related to health and
safety. Second, the relatively high wages paid to the
upstream workers can serve to bid up the price of hous-
ing, food, and other amenities—thereby increasing the
overall cost of living for long-time residents that may
not have the resources to bear it.
The demand for temporary housing will depend on many
factors. However, the “baseline” production scenario
discussed below contemplates 60 workers per well that
will require temporary housing accommodations. Com-
bined with the baseline assumptions about the (escalat-
ing) number of wells drilled per quarter, localities could
experience a demand to accommodate between 4,500
and 18,000 temporary workers per quarter. A change
to the scenario assumptions could potentially double
those numbers.
Based on Map 2, Barber, Comanche, and Harper Coun-
ties have attracted the most intent-to-drill applications.
Those three Kansas counties have a combined popula-
tion of about 12,800. That number is less than the
combined number of about 19,000 for the Oklahoma
counties of Alfalfa, Grant and Woods. The drilling activ-
ity represented in Table 5 indicates that the Oklahoma
counties have experience relevant for Kansans. The
workforce and infrastructure issues should share similar
characteristics.
The clear lesson learned from the experience of other
oil and gas boom localities is the importance of planning
and working collaboratively—among governments and
between governments and industry. The state of Kansas
has put in place the foundations of a planning process by
forming an Inter-Agency Working Group that includes
representatives from the Departments of Agriculture,
Transportation, Revenue and Health and Environment;
the Kansas Corporation Commission (KCC); the Kansas
Water Offce; the Attorney General’s Offce; and the
Kansas Housing Resources Corporation. The Group
has sent delegates on fact-fnding missions to North
Dakota and Mississippian-Lime areas of Oklahoma.
Local Kansas governments in counties along the Kansas
and Oklahoma boarder have also held cooperative plan-
ning meetings.
58
One key element of planning is to clearly delineate
roles and responsibilities. For example, says one of the
delegate reports: “North Dakota took the position that
the government’s job is to help plan/facilitate housing,
run sewer lines, and lay roads. The role of building
new housing stock should be the job of private indus-
try.”
59
Cooperative planning between government and
business can apply to road infrastructure just as easily
as it can apply to housing infrastructure. As the city
administrator for Kiowa City, Kansas said in a Kansas-
Oklahoma planning meeting: “There is merit in coming
together. Oil companies are not the big bad wolf. They
are businesses.”
60
Many businesses have learned as much as governments
with regard to past oil boom experiences—and choose
to take a proactive approach to the known infrastructure
issues. For example, Shell Oil, one of the three major
leaseholders associated with the Mississippian Lime play,
has a policy of proactively coordinating its transporta-
tion plans with local government offcials. When Shell
enters into a new county to conduct it exploration work,
company offcials meet with the county road and bridge
department and county commissioners to explain its
business goals and to seek opportunities to work with
the county to ensure that both parties interests are con-
sidered in the company’s business plans. Shell will also
work with the road and bridge department within the
county to identify the safest routes for Shell’s employee’s
and contractor’s vehicles to travel. Shell will then fle an
approved route map with the county and will require all
58 Yvonne Miller, “How to Prepare for and Capitalize on the Oil Boom?” Alva Review-Courier, February 8, 2012
59 http://www.kansascommerce.com/DocumentView.aspx?DID=1057
60 Yvonne Miller, “How to Prepare for and Capitalize on the Oil Boom?” Alva Review-Courier, February 8, 2012
48
of its employees and contractors to travel only on the
approved route. Failure to do so will result in corrective
action. If required, Shell will also make safety enhance-
ments to the approved routes to include the addition of
safety signage and road/bridge upgrades. Shell regularly
follows up with the county to maintain an open channel
of communication and to address concerns and unfore-
seen issues, if they arise. Shell monitors road conditions
daily along the approved routes and will work closely
with the county to maintain a safe roadway for Shell
and the community. If the company negatively impacts
a road, the company will work in coordination with the
county to repair the road at Shell’s cost.
61
Delineating roles between different jurisdictions of
government may be more important than delineating
roles between industry and government. Headwaters
Economics, a non-proft organization that studies rural
economies and land planning issues, has undertaken sev-
eral studies related to the impact on local communities
61 Author’s communication with offcials from Shell Oil.
62 See, for example: “Benefting from Unconventional Oil: State Fiscal Policy is Unprepared for the Heightened Community Impacts
of Unconventional Oil Plays,” April 2012. http://headwaterseconomics.org/
related to oil and gas booms. A prominent position
taken by this group concerns the split between local and
state government with regard to oil and gas tax revenue.
Since most of the real impact falls under the jurisdiction
of local government, Headwaters Economics criticizes
fscal systems that distribute a disproportionate share of
tax revenues away from local government toward state
government (especially if the state government does
not have clear policies related to how it will reallocate
the money to local governments, as demand requires).
62
One news report related to the Eagle Ford Shale in Texas
illuminates the importance of the point. In LaSalle
County, Texas, heavy truck traffc has severely degraded
the county’s “farm-to-market” road network. The chief
administrator for LaSalle County estimates that upgrad-
ing the county’s 230 miles of roads to withstand the
drilling-related traffc would cost $100 million. Yet the
county’s entire budget is about $6 million.
63
The wors-
ening road conditions and surge in traffc have caused a
63%
66%
39%
11%
35%
37%
34%
61%
89%
65%
0%
20%
40%
60%
80%
100%
Colorado Kansas Montana North Dakota Wyoming
Local Share State Share
Chart 27
Local versus State Government Shares of Oil and Gas Related Taxes and Royalties, Select States
Source: Headwaters Economics; Center for Applied Economics, KU School of Business
49
spike in traffc accidents in several counties in the Eagle
Ford Shale region. Another news report said: “County
judges in fve counties—Frio, LaSalle, Zavala, Dimmit
and Webb—were added to TxDOT’s energy task force
in May [2012]. The counties hope to have more of a
voice in state decisions, including how to get more tax
revenue from drilling to pay for road upkeep.”
64
(Related:
A study focusing on DeWitt County, Texas projected,
as an average, that road upgrade costs related to the life
of the Eagle Ford Shale could sum to approximately
$133,000 per well.
65
)
Chart 27 replicates research published by Headwaters
Economics, with Kansas added for comparison.
66
Local
governments in Kansas retain more oil and gas related
taxes than do local governments in the comparison states.
Based on the Headwaters Economics metric, local gov-
ernments in Kansas would seem to have better control
over the challenges that may arise from development
of the Mississippian Lime. The comparatively sound
fscal arrangement in Kansas—combined with proactive
cooperation with producers—should work to smooth
the planning process and facilitate better stakeholder
cooperation than has existed in other states. (Note that
metrics like those promoted by Headwaters Economics,
while useful, do not necessarily have a straight forward
interpretation. They require a detailed knowledge of a
particular state’s fscal system. In Texas, for example,
the state government collects the severance tax—but
current law dedicates the funds, in part, to the state’s
Permanent School Fund; in effect, an allocation to “local
government.” A change in allocation requires legislative
approval.
67
)
ESTIMATING POTENTIAL ECONOMIC IMPACTS IN
KANSAS
In 2011, Governor Brownback and the Kansas Leg-
islature (via SB 198) designated 50 counties as Rural
Opportunity Zones. New residents moving into these
counties, assuming they meet specifc criteria, become
eligible for a zero income tax rate for up to fve years
or assistance paying off student loans. To qualify as a
Rural Opportunity Zone, counties had to have experi-
enced population loss of at least 10 percent between the
2000 Census and the 2010 Census. With reference to
Map 2, 75 percent of the Mississippian Lime counties
also qualify as Rural Opportunity Zones—including
the current target counties of Barber, Comanche, and
Harper. Combined with the Rural Opportunity Zone
policies, the Mississippian Lime could act as a powerful
catalyst to the economic development sought by Kansas
lawmakers and citizens.
Attempting to estimate the economic impact of the
Mississippian Lime play on the state of Kansas requires
assumptions related to several uncertainties. For
example:
• What percentage of the geography shown in
Map 2 will warrant drilling?
• How many wells will producers choose to drill?
At what rate will they drill them?
• To date, the primary producers with lease con-
tracts reside outside of Kansas. How many
well-related jobs will consist of out-of-state
workers versus in-state workers? How much will
the out-of-state workers spend on the goods and
services offered by Kansas-based businesses?
• How much oil or gas will the average well pro-
duce? What percentage of each well’s produc-
tion will consist of oil versus natural gas?
• What price will the oil or gas fetch? Will the
price stay high enough to warrant horizontal
drilling costs? Will the relative price of oil and
gas change in a way that makes other plays more
economic than the Mississippian Lime play?
63 Ana Campoy, “Drilling Strains Rural Roads,” Wall Street Journal, July 27, 2012, p. A3.
64 http://www.mysanantonio.com/news/local_news/article/Drilling-takes-its-toll-on-roads-and-people-s-3690962.php#page-2
65 http://www.caller.com/news/2012/jul/02/study-shows-one-eagle-ford-shale-countys-road/
66 “Benefting from Unconventional Oil: State Fiscal Policy is Unprepared for the Heightened Community Impacts of Unconven-
tional Oil Plays,” April 2012, p. 16.
67 http://www.co.dewitt.tx.us/ips/export/sites/dewitt/downloads/Press_Release_Road_Damage_Cost_Allocation _Study_fnal.pdf
50
• What share of the royalty revenue generated
from production will circulate in the Kansas
economy?
• How much will tax revenues increase as the
result of the drilling and production processes?
A simulation model developed by the Center for Applied
Economics at the University of Kansas School of Busi-
ness provides some insight into these questions. The
discussion below outlines the framework and the results
related to select scenarios. Appendix A offers additional
details about the simulation model and the economic
impact estimation procedures.
The simulation model, which reports inputs and outputs
on a quarterly basis, begins with the following Baseline
Scenario (which is based on 10 calendar years, beginning
in January of 2013 and ending in December of 2022):
• In 2013, producers will drill 75 wells per quar-
ter. Each year, the number of wells drilled will
increase by an average of 25 per quarter. So,
producers will drill 100 wells per quarter in 2014,
125 per quarter in 2015, and so on until the
pace reaches 300 per quarter in the last scenario
year of 2022. This step change implies a total
of 7,500 wells—less than half the projected
number of potential wells (see Appendix A).
• Because out-of-state companies currently con-
trol most of the leases related to the horizontal
Mississippian Lime play, the baseline number
of Kansas-based well-drilling jobs begins at
zero in 2013 and grows by 2.5 percent each
year, implying that 22.5 percent of well-drilling
jobs will be Kansas-based jobs by 2022. (A
Kansas-based job is one in which the income
earned can be legitimately counted as belonging
to a Kansas resident. Jobs executed in Kansas
by residents of another state do not count as
Kansas-based jobs.)
• The Baseline Scenario—and every other sce-
nario—assumes a total of 60 drilling-related
jobs per well, with each well taking one month
to complete.
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2
0
1
3
-
Q
1
2
0
1
4
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1
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1
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1
M
i
l
l
i
o
n
s
Baseline Scenario 1 Scenario 5 Scenario 6
Chart 28
Growth of Kansas Income Resulting from Select Scenarios Related to the Mississippian Lime Play
Source: Center for Applied Economics, KU School of Business
51
• All jobs not considered Kansas-based jobs
assume a per diem per worker of $125 per
day. The hotel sector of the Kansas economy
receives $100 per day from each out-of-state
worker and the restaurant sector receives $25
per day. The expenditures equal new economic
activity that would not occur without the hori-
zontal-drilling Mississippian Lime play.
• The Baseline Scenario assumes that each well
supports 80 jobs related to the construction
sector of the economy. It counts 100 percent
of these jobs as Kansas-based jobs.
• The Baseline Scenario sets the price of oil at
$90 per barrel and sets the price of natural gas
at $3.50 per thousand cubic feet. Additionally, it
sets the production from each well at 55 percent
oil and 45 percent natural gas.
• The Baseline Scenario assumes that 100 per-
cent of the royalties earned from each well will
remain in Kansas as Kansas-based income. It
sets the royalty rate at 20 percent of the produc-
tion value from each well.
To build intuition about how changes to particular
variables will infuence the economic impact of the
Mississippian Lime play, a description of six scenarios
follows. Each scenario makes a 10 percent change rela-
tive to the baseline level of one particular variable. The
scenario numbering scheme ranks them from the most
positive to the least positive economic impact relative to
the Baseline Scenario.
Chart 28 illustrates how the Baseline Scenario, Scenario
1, Scenario 5, and Scenario 6 would infuence the growth
of aggregate Kansas income. Each scenario except
Scenario 6 assumes a steady increase in the pace of well
drilling. Scenario 6 offers one defnition of a pessimistic
scenario: it includes all elements of the Baseline Scenario,
except that the pace of well drilling equals 25 wells per
quarter for 10 years.
The Baseline Scenario would add an additional $166
million to the Kansas economy in the frst quarter of
2013. As producers drill an annually-increasing number
of wells (in stepwise fashion as per assumption) and
market the oil and gas, Kansas income begins to accu-
mulate each quarter. By the frst quarter of 2022, the
direct jobs, indirect jobs, and royalties associated with the
Mississippian Lime play contribute about $1.15 billion
each quarter to total Kansas income. Scenario 1 escalates
income growth more quickly than the Baseline Scenario
and adds about $1.3 billion to Kansas income by the frst
Table 6
Economic Impact Metrics Resulting from Select Scenarios Related to the Mississippian Lime Play
(Dollars in Millions)
Scenario
Performance Metric Base 1 2 3 4 5 6
Avg. Increase in In-State 1,908 2,100 1,954 1,930 1,886 1,790 161
Job Count per Quarter (1,717) (1,863) (1,886)
Avg. Increase in In-State $29.0 $31.8 $29.7 $29.4 $28.4 $27.4 $2.5
Income per Quarter ($26.0) ($28.1) ($28.4)
Avg. Increase in State $4.4 $4.9 $4.4 $4.9 $4.4 $4.4 $0.40
Severance Tax per Quarter ($4.0) ($4.4) ($4.0)
Avg. Increase in O&G $42.8 $47.1 $42.8 $47.3 $42.8 $42.8 $3.6
Property Tax per Quarter ($38.6) ($42.8) ($38.4)
Avg. Increase in Other
State & Local Taxes $3.6 $3.9 $3.7 $3.7 $3.6 $3.4 $0.31
($3.3) ($3.5) ($3.6)
Source: Center for Applied Economics, KU School of Business
Notes: Oil and gas property tax calculations follow the Kansas Department of Revenue protocols using a discount rate of 15% and an av-
erage annual operating cost per well of $500,000 in year one; $250,000 in year two; and $125,000 thereafter. The property tax calculations
also assume 140 total mills, which is the average total mills levied within the Mississippian Lime counties identi?ed in Map 2 from 2005 to
2010. Estimates for Other State & Local Taxes exclude state corporate income taxes and property taxes levied on properties classi?ed as
commercial/industrial due to unmanageable estimation uncertainties.
52
quarter of 2022. Scenario 6 escalates income growth less
quickly than the Baseline Scenario and adds about $1.0
billion to Kansas income by the frst quarter of 2022.
Scenarios 2 and 3 ft between the Baseline Scenario and
Scenario 1. Scenario 4 fts between the Baseline Scenario
and Scenario 5.
By design, Scenario 6 is a signifcant outlier. It basically
assumes that the Mississippian Lime play will gain no
more drilling-related momentum than it has experienced
to date. A “slow” pace of drilling is the best way to quan-
tify the economic impacts associated with a pessimistic
scenario (regardless of why that outcome occurs). Sce-
nario 6 adds about $58 million to the Kansas economy
in the frst quarter of 2013. By the frst quarter of 2022,
the direct jobs, indirect jobs, and royalties associated with
the Mississippian Lime play contribute about $103 mil-
lion each quarter to total Kansas income. (A complete
abandonment of horizontal drilling related to the Missis-
sippian Lime play would result in zero economic impact.)
Table 6 reports additional information related to the
economic impact of each scenario. To help facilitate
comparisons among the scenarios, Table 1 reports aver-
age increases per quarter for the various metrics. (Note
from Chart 28 that each year produces a signifcant
step change because of the assumption about how the
pace of change in well drilling takes place. The major
step change in each year is a straightforward part of the
calculated 10-year quarterly average.) Each scenario has
a linear character based on a 10 percent change, so the
reader can adjust the average quarterly change upward or
downward in proportion to different rates of change in
the variable. For example, with regard to Scenario 2, a
10 percent increase in the growth rate of in-state drilling
jobs results in a quarterly-average job count that is 2.3
percent higher than the baseline count and a quarterly-
average income accumulation that is 2.8 percent greater
than the baseline accumulation. An additional 10
percent increase in the growth of in-state drilling jobs
will double the percent changes from baseline—or, put
another way, a 20 percent increase in in-state drilling
jobs would increase the quarterly-average job count by
4.6 percent higher than baseline count and a quarterly-
average income accumulation that is 5.6 percent greater
than the baseline accumulation. (The variables will
interact if one assumes that they change simultaneously.
However, as a rough approximation, adding the quarterly
averages for each variable will provide intuition about
how different combinations of variables and different
growth rate assumptions will contribute to the overall
economic impact.)
Scenario 1: Increase (decrease) the pace of well drilling by 10
percent per year from baseline.
Not surprisingly, the pace of well drilling generates the
largest (positive or negative) economic impact of the six
scenarios, relative to the Baseline Scenario. Well drill-
ing supports jobs (directly and indirectly) and generates
income from royalties and business profts. The stream
of royalty incomes and business profts, in turn, support
additional jobs and business profts as it circulates in the
Kansas economy. The income generated from jobs, com-
merce, and production supports additional tax revenue
for state and local government.
Scenario 1 (a 10 percent increase in wells drilled) results
in 8,250 wells drilled relative to the baseline level of
7,500 (a 10 percent decrease results in 6,750 wells). As
explained in Appendix A, however, the Mississippian
Lime might yield a projected maximum number of
16,069 horizontal wells. If true, in the context of the
scenario framework, that would imply a 114 percent rate
of increase in the number of wells drilled. Such a rate
of increase would roughly double the fgures reported
in Table 6.
Scenario 2: Increase (decrease) the pace of Kansas-based drilling
jobs by 10 percent per year from baseline.
The second-place rank of this scenario (based on job and
income growth) underscores the point that job creation
drives the economic impact estimates more than the
royalty income generated by production. This scenario,
relative to Scenario 1, also helps to illustrate another
(obvious) point: the incomes generated by job creation
helps support Other Taxes but production value drives
Severance Taxes and Oil and Gas Property Taxes.
Scenario 3: Increase (decrease) the baseline price of oil and gas
by 10 percent.
53
This scenario ranks third in economic impact from an
overall job count and income perspective. However, it
has roughly the same impact as Scenario 1 from the per-
spective of Severance Taxes and Oil and Gas Property
Taxes, underscoring the importance of market prices for
Kansas producers and Kansas governments.
Related to oil and gas property taxes, the table below
provides estimates for the assessed value implied by
the simulations model’s representative well for three
different prices: the baseline price of $90 per barrel
of oil and $3.50 per thousand cubic feet; the baseline
price plus 10 percent; and the baseline price minus 10
percent. The reader can use these estimates to calculate
the property tax revenue potential per well in a specifc
taxing jurisdiction.
Baseline +10% -10%
Year 1 $428,337 $468,066 $380,208
Year 2 352,672 385,651 312,778
Year 3 294,252 322,018 260,715
Year 4 240,319 263,275 212,651
Year 5 189,086 207,470 166,994
Year 6 141,137 155,244 124,263
Year 7 96,803 106,954 84,753
Year 8 56,852 63,438 49,150
Year 9 21,845 25,310 17,954
Scenario 4: Decrease the royalties that remain in state by 10
percent from baseline.
This scenario, relative to the Baseline Scenario, illustrates
the relatively small jobs impact that royalty income gener-
ates in the economic impact simulation.
Scenario 5: Decrease the Kansas-based construction-related jobs
per well by 10 percent from baseline.
As discussed in connection with Scenario 2, job creation
generates the strongest economic impact. The more
well-drilling jobs and well-support jobs that become
Kansas-based jobs, the more the overall Kansas economy
will beneft from the Mississippian Lime play.
Scenario 6: Hold wells drilled to 25 per quarter for 10 years
(and retain all other Baseline Scenario assumptions).
As discussed above, this scenario is intended to illus-
trate that the Mississippian Lime play may not fulfll
the optimistic expectations held by many stakeholders.
Producers in Oklahoma have reported successful out-
comes—and Sandridge Energy has publicly communi-
cated with potential investors that the Kansas geology
holds similar promise. But the Kansas-based activity still
needs to prove itself.
COALBED METHANE IN EASTERN KANSAS
The well-known phrase “canary in a coal mine” derived
from the known hazards of noxious gas that could
imperil coal miners. Miners would carry caged birds
into mines with them. If harmful gas flled the air, the
birds would succumb before the miners, providing a
warning signal.
Methane (and other gases) enters coal through a process
of absorption. The gas lines the pores of the coal in a
near-liquid state.
68
The gas often leaks from naturally-
occurring fractures in coal formations.
Butler
Clay
Cowley
Dickinson
Douglas
Geary
Jefferson
Leavenworth
Marion
Marshall
Morris
Pottawatomie
Riley
Shawnee
Washington
Wyandotte
238 (0.6%)
Allen
26 (0%)
Anderson
18 (0%)
Atchison
178 (0.1%)
Bourbon
2 (0%)
Brown
2 (0%)
Chase
155 (0.3%)
Chautauqua
1 (0%)
Cherokee
108 (0.4%)
Coffey
56 (0.1%)
Crawford
12 (0%)
Doniphan
52 (0%)
Elk
4 (0%)
Franklin
12 (0%)
Greenwood
14 (0%)
Jackson
44 (0%)
Johnson
661 (7.4%)
Labette
34 (0%)
Linn
13 (0%)
Lyon
316 (0.8%)
Miami
1892 (26.3%)
Montgomery
16 (0%)
Nemaha
778 (32.3%)
Neosho
3 (0%)
Osage
6 (0%)
Wabaunsee
1911 (31.2%)
Wilson
43 (0%)
Woodson
Map 3
Coalbed Methane Activity in Eastern Kansas,
Wells Drilled (Share of Cumulative Production)
Source: Kansas Geological Survey
54
0.09 0.08 0.10 0.14 0.14 0.32
0.63
1.8
5.6
8.5
13.5
22.7
36.2
44.3
43.8
39.1
36.1
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s
o
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C
u
b
i
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F
e
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t
Chart 30
Kansas Coalbed Methane Production, 1995-2011
Source: Kansas Geological Survey; Independent Oil & Gas Services (Red Top News); U.S. Energy Information Administration
57161
0
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Count of CBM Wells Drilled Kansas Natural Gas Price (2010$)
Chart 29
Kansas Coalbed Methane Wells Drilled and Kansas Natural Gas Price, 1981-2011
55
Coalbed methane, or CBM, counts as an “unconven-
tional” hydrocarbon source because producers must
access it in ways technically different from (and typically
more costly than) the techniques used to produce natural
gas from “conventional” source rocks (like sandstone).
Coal has much lower permeability than conventional
source rocks. A signifcant element of stimulating gas
production deals with dewatering the coalbed to relieve
the pressure that traps the gas in the pores of the coal.
Two coal basins—known as the Forest City and Chero-
kee basins—lie underneath the eastern quarter of the
state of Kansas.
69
With reference to Map 3, the Forest
City Basin generally encompasses the upper half of Cof-
fey, Anderson, and Linn Counties and the counties north
of those; the Cherokee Basin generally encompasses the
counties south of those. (A formation known as the
Boubon arch overlaps the two basins.) These basins
contain many different strata of coal of varying depths
and breadths. A typical wellbore can encounter up to 14
different coal beds, each of which may yield methane.
70
According to geologists at the Kansas Geological Survey:
“The gas storage capacity of a coal is a complex func-
tion of reservoir temperature and pressure, composition,
micropore structure, and molecular properties of its
absorbed gas.”
71
The historical record indicates that producers in south-
eastern Kansas had some commercial success with CBM
production from the 1920s into the 1930s.
72
Despite
this early record of success, the CBM resource did not
attract serious attention until the 1980s. The Kansas
Geological Survey only has records of CBM wells dating
back to 1981. This date marks the beginning of a federal
government tax incentive related to CBM production
from new wells, which operated until 1992. The federal
government extended the tax incentive from 1993 to
2002—but the extended incentive applied to gas pro-
duced from “recompleted” wells rather than new well.
Map 3 illustrates that four counties within the Cherokee
Basin—Labette, Montgomery, Neosho, and Wilson—
account for about 80 percent of the CBM wells drilled
and about 97 percent of the cumulative production.
However, exploration has taken place in all of the blue-
colored counties on the map.
Chart 29 and Chart 30 reveal that, although interest in
CBM dates back to 1981, notable progress with develop-
ing this resource did not begin until about 2000. The
uptick in drilling activity in the early 1990s seems coinci-
dent with the up-coming termination of the federal tax
credit program. Not surprisingly, the most concerted
effort coincides with the escalation of natural gas prices.
(However, a substantial amount of learning no doubt
accrued in the two decades prior to the price escalation
that allowed Kansas producers to confdently respond
to the price signals.
73
) The rapid escalation in drilling
illustrated by Chart 29 had an obvious outcome on the
amount of annual coalbed methane production shown
in Chart 30. For perspective, despite the impressive
boom in the cumulative production of coalbed methane,
it amounted to 9.4 percent of total natural gas produc-
tion over the 2005-to-2011 time period, with the highest
percentage equaling 12.2 percent in 2009.
The U.S. Energy Information Administration tracks
coalbed methane production among the states. Records
for most states begin in 2005. However, the records for
three states begin in 1989: Alabama, Colorado, and New
Mexico got a head start in meaningful CBM production.
Despite the head start, those states’ production seems
to have peaked. Alabama’s CBM production peaked in
1998; Colorado’s in 2002; and New Mexico’s in 1997.
68 http://en.wikipedia.org/wiki/Coalbed_methane
69 K. David Newell, et al., “Geological and Geochemical Factors Infuencing the Emerging Coalbed Gas Play in the Cherokee and
Forest City Basins in Eastern Kansas,” Kansas Geological Survey, Open-File Report 2004-17.
http://www.kgs.ku.edu/PRS/publication/2004/AAPG/Coalbed/P1-02.html.
70 K David Newell, et al., “Coalbed Gas Play Emerges in Eastern Kansas Basins,” Oil and Gas Journal, December 23, 2002, p. 36.
71 Ibid., p. 37.
72 William T. Stoeckinger, “Kansas Coalbed Methane Comes on Stream,” Oil and Gas Journal, Vol. 88, No. 23, June 1990, 88-90.
73 K. David Newell, “Communications from Individuals Regarding Their Role in the History of the Coalbed Natural Gas Play in
Eastern Kansas, circa 1990 to 2010,” Kansas Geological Survey, Open-File Report 2010-15, November 17, 2010.
http://www.kgs.ku.edu/PRS/publication/2010/OFR10_15/KGS_OFR_2010-15.pdf
56
Table 7 reports the cumulative production for those
states with records of CBM production. Colorado,
Wyoming, and New Mexico produce signifcantly more
CBM than the other states. By the U.S. Energy Informa-
tion Administration’s reckoning, Kansas ranks 8
th
out of
13 states. (The EIA fgure of 211 bcf contrasts with
the fgures reported in Chart 30, which sum to 200 bcf.)
Table 7
State-by-State Cumulative Coalbed Methane
Production, 2005-2010, Billions of Cubic Feet
Share of U.S.
Cumulative Cumulative
Production Production
State 2005-2010 2005-2010
Alabama 655 5.95%
Arkansas 17 0.15
Colorado 3,039 27.62
Kansas 211 1.92
Louisiana 2 0.02
Montana 73 0.66
New Mexico 2,695 24.49
Oklahoma 377 3.43
Pennsylvania 43 0.39
Utah 422 3.84
Virginia 531 4.83
West Virginia 149 1.35
Wyoming 2,789 25.35
U.S. 11,003 100.0%
Source: U.S. Energy Information Administration
Scientists at the Kansas Geological Survey estimate that
the coalbeds of Kansas may contain about one trillion
cubic feet of natural gas.
74
At the rate of production
shown in Chart 30 for 2008 and 2009, Kansas could
produce coalbed methane for about 22 years. However,
based on current economics, as suggested by the pattern
of drilling and production illustrated by Chart 29 and
Chart 30, natural gas prices need to be at least $5.00
per thousand cubic feet for this level of production to
sustain itself.
Assessing History: How the
Oil and Gas Industry Has
Contributed to the Kansas
Economy
Entrepreneurial success often results from serendipity.
New value propositions frequently emerge through
accidental discoveries about how to create value for
people. Native Americans had long attributed heal-
ing properties to the petroleum that seeped out of the
ground. But no one attributed to it much commercial
potential except as a medicine until around 1850s. People
used whale oil to light their lamps. In fact, about 1830, an
enterprising Johnson County man had a successful busi-
ness helping to supply pioneers heading out on the Santa
Fe Trail. The slick sheen of petroleum on the water in
his well disappointed him—because he thought of value
as supplying fresh water—until he discovered that he
could sell the slick stuff as lubricant for wagon wheels.
75
The oil industry began as the result of similar serendip-
ity—serendipity related to the mining of salt. Salt had
a known commercial value, and the production of salt
from salt water wells had an annoying byproduct in
northwestern Pennsylvania: petroleum seepage. A man
named Samuel Kier had to dispose of the petroleum
that seeped into his salt well. When he discovered that
it caught fre, his entrepreneurial urges drove him to
experiment with various petroleum-based products.
Petroleum jelly (an ointment used in a medicinal man-
ner familiar to Native Americans) remains with us today,
but it did not sell well then. Kier’s development of a
cost-effective method for producing kerosene had more
success. Kerosene became an excellent substitute for
whale oil as a lamp fuel. In 1853, in order to market
kerosene, Kier created the frst oil refnery, which he
located in Pittsburg, Pennsylvania, and refned the oil
gathered from area salt mines.
76
The commercial potential of kerosene motivated people
to search for oil for its own sake. A man named Edwin
Drake (along with a technically competent assistant
named “Uncle Billy” Smith) had the idea that the meth-
ods used for salt water well drilling could be used for oil
well drilling. He was partly right. The problem came
when the wells would fll with water and collapse. He
innovated by frst driving an iron pipe to the bedrock
and then drilled inside the pipe to prevent collapse. It
worked—and the technique became a standard feature
of drilling operations—the same feature (dramatically
74 Private conversation with Dr. David Newell of the Kansas Geological Survey.
75 Craig Miner, Discovery! (Wichita, Kansas: KIOGA, 1987), p. 13.
76 http://en.wikipedia.org/wiki/Samuel_Martin_Kier
57
advanced) that also protects drinking water supplies dur-
ing current-day drilling operations. Historians typically
credit Drake as drilling the nation’s frst commercial oil
well in Titusville, Pennsylvania in 1859.
77
The frst ship-
ment of oil from that well reportedly went to Samuel
Kier’s refnery in Pittsburg.
78
The success of Drake’s drilling method and Kier’s mar-
keting innovations drew people into the oil industry. The
frst oil boom happened in northwestern Pennsylvania
from 1859 to 1870.
79
Talented men began to learn the
risks and rewards of the oil business.
A BRIEF ECONOMIC HISTORY OF OIL AND GAS IN
KANSAS
Map 4 shows that those talented men began to migrate to
other oil-rich locations—Kansas being among the frst.
Oil entrepreneurs knew Kansas had potential because
the frst attempt at drilling for oil in Kansas occurred
near Paola, Kansas in 1860.
80
By the mid-1860s, Fort
Scott, Kansas had become one of the state’s frst “boom”
towns, and began piping natural gas to homes.
81
George W. Brown, editor of a Lawrence, Kansas news-
paper known as the Herald of Freedom, became a key
fgure in early Kansas oil and gas history. He had come
to Kansas in 1854 from Pennsylvania where he had
edited a newspaper. Brown’s Pennsylvania roots and
connections gave him a keen awareness of the seminal
oil activity taking place there, and he understood what
it implied for Kansas. Brown organized the drilling
of the Paola well in 1860, along with many other wells
thereafter.
82
1925
1939
1912
1884
1880
1901
1905
1937
1927
Map 4
Major Migrations of Oil Men
Source: Samuel W. Tait, Jr., The Wildcatters: An Informal History of Oil-Hunting in America, p. xiv.
77 http://en.wikipedia.org/wiki/Edwin_L._Drake
78 http://en.wikipedia.org/wiki/Samuel_Martin_Kier
79 http://en.wikipedia.org/wiki/Pennsylvanian_oil_rush
80 Miner, Discovery!, p. 16.
81 Ibid., p. 47
58
William M. Mills came to Kansas from Pennsylvania in
1884 (the man represented by the arrow on Map 4). His
central role in the successful development of Kansas oil
and gas felds earned him the respectful moniker: “the
Drake of the western feld.”
83
Mills had all the attributes
of an iconic entrepreneur and pioneer. He made and
lost a fortune in Pennsylvania before he decamped to
eastern Kansas to put in the grinding due-diligence and
relationship-building necessary to rebuild the fortune
he lost. Before ultimately settling in the town of Paola,
Mills (and his wife) explored as far west as Salina and as
far south as Coffeyville. He became as knowledgeable as
anyone at the time about oil and gas prospects in Kansas.
Mills’ explorations and partnerships facilitated the iconic
status of two other partnerships in Kansas petroleum-
industry history: McBride & Bloom and Guffey &
Galey. Albert McBride (Miami County) and Camden
Bloom (Montgomery County) were two Kansas boys
that, despite their youth, had profciency in the art and
science of well drilling. They became the contractors of
choice in their era; and drilled Norman #1 (in Neode-
sha in 1892), which, according to the National Historic
Landmarks Program, signifes the beginning of develop-
ment of the Mid-Continent oil feld.
84
Mills made the
acquaintance of James Guffey and John Galey while in
Pittsburg, Pennsylvania on a trip to recruit venture capital
partners. Guffey and Galey had wildcatter blood in their
veins and seized the opportunity. As Kansas petroleum
industry historian Craig Miner put it: “Guffey and Galey
had more than experience: they had also the daring nec-
essary to plunge into Kansas without hesitation. The
two were described as ‘extensive and daring operators’
in the Pennsylvania feld, and there was no question that
their vision and determination corresponded well with
Mills’ own. An observer at the time commented of the
association between Mills, Guffey, and Galey that ‘These
men, taken together, were the embodiment of American
vigor and push.’”
85
Natural gas had a better commercial market than oil
when Mills got started in Kansas. Town people under-
stood the utility of gas for lighting, cooking, and heating
(both residentially and industrially). But Mills and his
associates systematically (and relatively inexpensively)
acquired land leases and drilled oil wells, often plugging
them once they discovered oil-producing wells.
Of course, Mills and associates were not alone; many
other entrepreneurs had entered the business. How-
ever, the overall development of the market took place
slowly. Producers faced a chicken-and-egg problem.
Commercially viable oil production required an infra-
structure; infrastructure required commercially viable
oil production.
The arrival of John D. Rockefeller’s Standard Oil (via its
Forrest Oil subsidiary) in the mid-1890s, which bought
holdings from Guffey and Galey, resolved the chicken-
and-egg problem. It brought investment capital, access
to markets, industry know-how, and plans to build a
refnery in Neodesha (1897), which ended up refning
about 3,000 barrels a day by 1903.
The result was “the boom of 1903.” Craig Miner’s
description of the boom in 1903 sounds just like stories
about Williston, North Dakota in 2012. (Multiply each
dollar fgure in Miner’s description by 25 to approximate
today’s dollars.)
86
The growth of towns in the oil and gas belt
seemed magic. Iola built some of the largest
gas engines in the world in 1903, boasted one
of the most complete cement plants west of the
Mississippi, the largest number of zinc smelting
retorts in the U.S., and probably the only sulph-
uric acid works in the world where natural gas
was used in the reduction. In six years, Iola had
grown from 1,500 to 10,000 and had a monthly
payroll of $100,000. It was constructing an
$80,000 water works and an electric light plant,
and had a $150,000 electric interurban running
82 Ibid., p. 14.
83 Ibid., p. 32.
84 http://en.wikipedia.org/wiki/Norman_No._1_Oil_Well
85 Miner, Discovery!, p. 38.
86 http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm
59
from the Neosho River through Iola and on to
Gas City, Lanyonville and LaHarpe. Manufac-
turing included an ice plant and cold storage
company with a daily capacity of 50 tons, an
iron foundry, a planning mill, a creamery, four
and feed mills and a saw mill. Independence in
1903 opened the Carl-Leon Hotel at a cost of
$50,000 for the building and $15,000 for the
furnishings. It had a spacious offce complete
with a massive freplace of Independence bricks,
fred using the town’s natural gas, and rooms
equal to anything in Kansas City. There were
electric bells in the Carl-Leon, fre alarms, bell
boy service and reading and writing rooms.
Chanute in 1903 established a stock exchange
at the Hetrick opera house, primarily to aid
promoters in placing the stock of new oil
companies. Oil roads and electric traction
lines into the oil felds were suggested daily.
All this, most thought, was courtesy of oil and
gas combined with the “energy and hustle of
fore-sighted businessmen” who could see that
“there are other very good opportunities for
making money in the Kansas gas and oil feld
apart from getting it from under the surface of
the ground.”
Economic statistics seemed like fantasy. In
1905, it was estimated that the oil and gas
industry had added $50 million to the value of
Kansas property. It had “doubled the popula-
tion of nearly every town in the oil region and
brought many men of national reputation in
the feld of fnance within her borders. The
industry has transformed an agricultural state
into a commercial and industrial empire.” In
November, 1903, there were 200 drilling rigs
at work in Kansas, manned by 400 drillers and
400 tool dressers. Supply houses serving the
Kansas oilpatch were making $200,000 a month,
and hotel receipts in the Iola area were about
$500,000 a year…
87
0.0%
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KS Share of U.S. Oil Producton KS Share of U.S. Gas Producton
Chart 31
Kansas Oil and Gas Production as a Share of U.S. Production
Source: Kansas Geological Survey; U.S. Energy Information Administration
60
Chart 31 illustrates the 1903 booms in Kansas in the con-
text of the central role Kansas played in the birth of the
U.S. oil and gas industry. As a share of U.S. production,
natural gas grew from 3.5 percent to 8.6 percent and oil
grew from 0.4 percent to 3.6 percent. (Table 8 provides
additional details about the time line of key events infu-
encing the movement of the curves in Chart 31.)
The gas share kept growing because the year 1903
foreshadowed another major Kansas oil boom—much
more substantial than the frst, illustrated by Chart 31
as the oil production boom starting in 1915. In 1903,
four businessmen in Augusta, Kansas met to discuss the
prospect of drilling for gas in order to heat and light the
city. To execute their plans, they formed the Augusta Oil,
Gas, Mining and Prospecting Company. A rig builder
and tool dresser recently recruited from Ohio to Kansas
got the business to drill a well. In July of 1903, the crew
hit gas at 1,356 feet.
88
Another entrepreneurial effort born of the new-found
understanding of how to create commercial value from
natural gas helped advance the industry in Kansas.
Much like Rockefeller’s insight that the oil industry could
beneft from disciplined management in a consolidated
holding structure, a man named Henry L. Doherty began
to acquire many dozens of city gas services under the
company name of Cities Service. Such an operation
required reliable supplies of gas. Mr. Doherty invested
in trained geologists to help. A geologist named Charles
Gould (with a partner) took on the task in 1913 of
exploring around the existing gas pipelines in Butler
County, Kansas. They produced a scientifcally detailed,
color-coded contour map that represented an important
innovation at the time.
Table 8
Select Events in Early Kansas Oil & Gas History
1860 First oil well drilled near Paola (Miami County)
1873 Gas discovered at Iola (Allen County)
1886 Small re?nery erected at Paola
1892 First commercial well (Norman #1) at Neodesha
(Wilson County)
1897 Standard Oil re?nery completed at Neodesha
1903 First 1,000 barrel/day well, Bolton ?eld
(Montgomery County)
1914 Discovery of Augusta ?eld (Butler County)
1915 Discovery of El Dorado ?eld (Butler County)
1917 Discovery of “Golden Lanes” (Greenwood County)
1922 Discovery of Hugoton gas ?eld (Seward County)
1923 Discovery of Fairport ?eld (Russell County)
Source: Daniel F. Merriam, “Exploring for Petroleum in the Flat-
lands: History of Oil and Gas Exploration in Kansas,” Oil-Industry
History, Vol. 3, No. 1, 2002, p. 56.
As with so many technological advancements, the skep-
tics abounded initially (Cities Service directors among
them).
89
But the science behind the color-coded maps
worked—beginning the long process discussed above
related to innovations that worked to minimize the
drilling of dry holes. The science found the gas—and
it found the oil (which had a lower priority at the time).
In 1914, the city fathers of El Dorado decided that they
wanted to drill for the city’s own gas source. After some
false starts, the new geological science worked in El
Dorado just as it had worked in Augusta. In 1915, crews
had discovered oil in a well called Stapleton #1. No one
realized it at the time, but they had discovered one of
the largest pools of oil in the continental United States.
The El Dorado boom commenced—aided strongly by
the demand for oil generated by World War I. Leases in
El Dorado reached $3,750 per acre. (In today’s dollars,
that would be 25 to 30 times more than current-day
leases fetch in relation to the Mississippian Lime play!)
The population of Butler County exploded, increasing
from 23,059 in 1910 to 43,842 in 1920, with most of the
surge happening after 1915.
Historian Craig Miner provides the following account
from a contemporary writing in the advanced stages of
the El Dorado oil boom, which signifcantly aided the
war effort: “Standing on an eminence at the western edge
87 Miner, Discovery!, pp. 93-94.
88 Ibid., p. 120.
89 Ibid., pp. 120-123.
61
of the city, the spectator can look for miles at an endless
feld of derricks set out in rows with all the regularity of
a new apple orchard. Up hill and down hill, the rows
run until they are lost in the distance. As a matter of
fact, there are more than a thousand derricks in sight,
each one pumping from mother earth the liquid that is
destined to play the biggest part in reclaiming the world
for democracy.”
90
Chart 32 converts the production data illustrated in Chart
21 (and implied by Chart 31) into infation-adjusted dol-
lars based on production volumes and prevailing prices.
Kansas offered an excellent platform from which to initi-
ate the oil boom in the Mid-Continent because much of
the gas and oil resided in relatively shallow depths which
wildcatters could reach with early drilling technologies.
91
As Chart 31 implies, however, other states have more
petroleum resources than Kansas. After the steady
depletions of the early oil discoveries and the Hugoton
gas feld, Kansas has consistently produced less than fve
percent of U.S. oil and gas volumes.
Table 9
Top-15 States, as Ranked by Upstream Industry
Average Share of State Gross Domestic Product,
1965-2010
Avg. Share of State GDP (%)
1965 1965 1985 2005
to to to to
Rank State 2010 1970 1990 2010
1 Alaska 26.3 12.4% 33.8 28.7
2 Wyoming 24.4 21.1 23.0 31.6
3 Louisiana 19.8 21.5 21.5 19.1
4 New Mexico 12.2 11.8 9.3 15.6
5 Oklahoma 10.8 8.9 9.8 14.5
6 Texas 9.8 9.2 9.6 11.3
7 North Dakota 4.8 2.6 6.8 5.2
8 Montana 3.4 2.7 3.5 4.3
9 Colorado 3.0 1.2 2.1 5.0
10 Utah 2.1 2.0 2.7 2.7
11 Kansas 2.0 4.1 2.5 1.6
12 Mississippi 1.9 2.6 2.6 1.7
13 Arkansas 1.7 1.1 1.1 3.1
14 West Virginia 1.6 1.2 1.6 2.4
15 Alabama 1.2 0.2 0.6 2.1
Source: U.S. Bureau of Economic Analysis; U.S. Census Bureau;
U.S. Bureau of Labor Statistics; Center for Applied Economics, KU
School of Business
90 Ibid., p. 118.
91 Merriam, “Advances in the Science and Technology of Finding and Producing Oil in Kansas,” pp. 30-33.
$0
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Oil Value Gas Value
Chart 32
Annual Market Value of Kansas Oil and Natural Gas (2010$)
Source: Kansas Geological Survey
62
THE UPSTREAM SECTOR AND KANSAS GROSS
DOMESTIC PRODUCT
Nevertheless, the dollars earned on Kansas production
have consistently made healthy contributions to the value
created in the Kansas economy. Table 9 provides a snap-
shot of the top-15 states with regard to the contribution
made to total state gross domestic product (GDP) by oil
and gas extraction activity (essentially, a signifcant frac-
tion of the upstream sector, as defned in this report)
from 1965 to 2010. The table also compares 5-year
average GDP shares for select time periods.
Note the signifcant variation among the states and the
select time periods. These variations relate to the pat-
terns of exploration, discovery, production, and price.
Nine of the 15 states show a higher average GDP share
for the 2005-2010 period than the 1985-1990 period.
These increases capture the surge in activity related to
the widespread unconventional (shale) oil and gas plays
along with the signifcant price surge beginning in 2004
and ending in 2009. (See Table B6 and Table B7 in
Appendix B for state-by-state data related to oil and gas
production volumes.)
Kansas producers benefted from the price surge. How-
ever, the state did not rank among the states with an
increased share of GDP related to oil and gas extraction.
Perhaps the Mississippian Lime plays will change that
in the next several years. More importantly, however, a
declining share of upstream-related GDP does not nec-
essarily convey a negative message. The Kansas oil and
gas industry has made a steady contribution to the Kan-
sas economy, but the state has increased its GDP in other
areas, thereby shrinking the stable contribution made by
oil and gas extraction. For example, a substantial amount
of economic growth in Kansas has taken place in the
Northeast corner of the state—around the Kansas City
area—a region with few oil and gas resources. This
growth has reduced the measured statewide economic
contribution made by the oil and gas industry, but it in
no way diminishes the regional (or statewide) importance
of the industry.
0.00
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3.50
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
G
r
w
o
t
h
I
n
d
e
x
(
1
9
9
0
=
1
)
Oil Price Gas Price Payroll per Job Jobs GDP from Upstream Oil & Gas
Chart 33
Growth Trends of Oil and Gas Prices and Components of GDP
Source: U.S. Energy Information Administration; U.S. Bureau of Economic Analysis; Center for Applied Economics, KU School of Business
63
Chart 33 provides a brief tutorial on the interaction
of oil and gas prices and the gross domestic product
generated by oil and gas extraction activity over the
past two decades. Recall that Kansas oil and gas pro-
ducers behave as price takers: their production activity
has essentially no infuence on market prices and their
exploration, drilling, and production activity essentially
reacts to the production economics dictated by changing
market prices. The chart shows relative growth trends
among infation-adjusted: Kansas oil and gas wellhead
prices, the GDP from oil and gas, and the payroll (wages
plus benefts) per job for the people employed in the
sector. (Unlike elsewhere in the report, Non-employer
businesses and their revenues are not included in the
payroll and jobs computation, but will be embodied in
the GDP trend line.)
GDP is a measure of the market value of production. As
a practical matter, the government measures it with refer-
ence to employee compensation and before-tax business
profts. Chart 33 shows that GDP tends to track closely
with changes in the level of oil and gas prices. Statisti-
cally, for the years shown, changes in Kansas GDP in the
oil and gas extraction sector and the price of oil or gas
have a correlation coeffcient of about 0.85, indicating a
tight co-movement. Naturally, a signifcant amount of
that extra GDP goes to producers as before-tax proft.
But also note the trend in “Payroll per Job.” It has a
tight co-movement with the price of oil or gas, with an
oil-price correlation coeffcient of 0.89 and a gas-price
correlation coeffcient of 0.81. As in almost all sectors
of a well-functioning market economy, employees share
in the economic value they help create.
The “Jobs” trend in Chart 33 has a more nuanced eco-
nomic story. Jobs trended upward beginning in 2005
as oil and gas prices rose, but overall the trend in Jobs
shows an inverse co-movement (a negative statistical
relationship) with oil and gas prices over the time period
illustrated. Production—not price—drives jobs. The
Key
Less than 5%
5% to 10%
10% to 20%
Greater than 20%
Map 5
County-by-County Share of Jobs in the Upstream Sector
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau
64
change in jobs has a tight co-movement with the change in
oil or gas production (not illustrated): Jobs and oil pro-
duction has a correlation coeffcient of 0.92; Jobs and
gas production has a coeffcient of 0.77. The upward
trend in Jobs in 2005 resulted from the upward trend in
oil prices because the substantial price increases made it
economically worthwhile to increase production. (Gas
production did not increase. Despite the surge in natural
gas price that motivated a surge in drilling, as illustrated
in Chart 1, and especially the increase in coalbed methane
production illustrated in Chart 30, the added natural gas
production could not offset the declining production
from the Hugoton Gas Area, which represented about
45 percent of Kansas gas production during this time
frame.)
Map 5 helps provide a nationwide perspective about
the location of jobs in the oil and gas upstream sector.
Map 6 provides a Kansas close-up of Map 5. The maps
record the county-by-county average share, from 1998 to
2010, of all jobs in the upstream sector relative to all jobs
in the private sector. (The defnition of the upstream
sector is described below.)
As referenced above in connection to Kansas GDP, the
upstream sector makes a signifcant contribution to the
GDP generated in most parts of the state—except for
the northeast part of the state. As a simple illustration,
imagine drawing a line on Map 6 from the top corner of
Saline County to the Middle of Johnson County. Every
county that touches the line or is north of the line will
represent the northeast. On average, from 2005 through
2010, those counties represented about 53 percent of
Kansas GDP. With reference back to Table 9, removing
the northeast GDP from the calculation would increase
oil and gas extraction from 1.6 percent of Kansas GDP
to 3.4 percent. For the 2005 to 2010 time period that
0.0%
Doniphan
0.0%
Jewell
0.0%
Lincoln
0.0%
Marshall
0.0%
Republic
0.0%
Smith
0.0%
Wallace
0.0%
Brown
0.0%
Cherokee
0.1%
Wyandotte
0.1%
Geary
0.2%
Nemaha
0.2%
Shawnee
0.2%
Pottawatomie
0.2%
Mitchell
0.3%
Sherman
0.3%
Atchison
0.3%
Cloud
0.4%
Jackson
0.4%
Dickinson
0.5%
Osage
0.5%
Jefferson
0.6%
Clay
0.7%
Leavenworth
0.7%
Crawford
0.8%
Labette
0.8%
Riley
0.8%
Washington
0.9%
Ottawa
0.9%
Wabaunsee
1.0%
Johnson
1.0%
Bourbon
1.1%
Douglas
1.2%
Saline
1.5%
Lyon
1.9%
Rawlins
1.9%
Thomas
1.9%
Ford
2.0%
Wichita
2.3%
Cheyenne
2.4%
Harvey
2.4%
Morris
2.5%
Hodgeman
2.6%
Gray
2.9%
Hamilton
3.1%
Scott
3.4%
Gove
3.5%
Linn
3.5%
Edwards
3.9%
Chase
4.0%
Franklin
4.0%
Reno
4.2%
Miami
4.3%
Pawnee
4.3%
Marion
4.8%
Sumner
4.9%
Logan
5.3%
Ellsworth
5.5%
Montgomery
5.6%
Lane
5.6%
Sedgwick
6.0%
Decatur
6.4%
Anderson
6.5%
Osborne
6.5%
Finney
6.7%
Rush
6.7%
Butler
6.9%
Meade
7.1%
Cowley
7.1%
Wilson
7.3%
Comanche
7.7%
Phillips
7.8%
Neosho
8.4%
Norton
8.4%
Mcpherson
8.5%
Coffey
8.5%
Stanton
8.7%
Kearny
8.9%
Allen
9.6%
Sheridan
9.8%
Trego
10.3%
Haskell
10.9%
Greeley
11.0%
Clark
11.2%
Stevens
15.2%
Harper
17.1%
Seward
17.6%
Rice
17.7%
Kiowa
18.0%
Kingman
18.6%
Pratt
19.7%
Stafford
20.4%
Grant
21.4%
Ellis
22.9%
Elk
26.1%
Graham
28.4%
Greenwood
28.4%
Rooks
29.1%
Morton
29.6%
Barton
31.4%
Woodson
32.3%
Chautauqua
32.4%
Barber
42.2%
Ness
44.2%
Russell
Key
Less than 5%
5% to 10%
10% to 20%
Greater than 20%
Map 6
Kansas Close-Up County-by-County Share of Jobs in the Upstream Sector
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau
65
Key
$0.0 to $1.0
$1.0 to $25.0
$25.0 to $50.0
More than $50.0
$19 (49)
Allen
$17 (50)
Anderson
0
Atchison
$147.5 (6)
Barber
$166.6 (2)
Barton
$4.2 (71)
Bourbon
0
Brown
$86.6 (12)
Butler
$2.2 (76)
Chase
$19.3 (48)
Chautauqua
0
Cherokee
$5.9 (67)
Cheyenne
$22.9 (40)
Clark
$0.3 (85)
Clay
0
Cloud
$20.2 (44)
Coffey
$25.3 (36)
Comanche
$35.5 (25)
Cowley
$2.2 (78)
Crawford
$21.5 (43)
Decatur
$0.6 (82)
Dickinson
0
Doniphan
$3.6 (72)
Douglas
$12.2 (54)
Edwards
$5.4 (68)
Elk
$264.3 (1)
Ellis
$20.2 (45)
Ellsworth
$124 (8)
Finney
$34.8 (27)
Ford
$10.3 (60)
Franklin
$0.2 (86)
Geary
$90 (11)
Gove
$117.5 (9)
Graham
$29.3 (33)
Grant
$7.1 (64)
Gray
$13.1 (53)
Greeley
$34.2 (28)
Greenwood
0
Hamilton
$37.4 (23)
Harper
$9.7 (62)
Harvey
$143.8 (7)
Haskell
$37.3 (24)
Hodgeman
$0.05 (89)
Jackson
$1.4 (80)
Jefferson
0
Jewell
$14 (52)
Johnson
$20 (46)
Kearny
$42.7 (20)
Kingman
$24.7 (37)
Kiowa
$0.5 (83)
Labette
$79.8 (13)
Lane
$4.5 (70)
Leavenworth
0
Lincoln
$6.7 (65)
Linn
$75.1 (14)
Logan
$1.5 (79)
Lyon
$11.7 (56)
Marion
0
Marshall
$32.6 (29)
Mcpherson
$35.3 (26)
Meade
$11.4 (58)
Miami
0
Mitchell
$11.6 (57)
Montgomery
$5.1 (69)
Morris
$40 (21)
Morton
$3.5 (73)
Nemaha
$2.2 (77)
Neosho
$148.7 (5)
Ness
$25.4 (35)
Norton
$0.1 (87)
Osage
$14.1 (51)
Osborne
0
Ottawa
$19.9 (47)
Pawnee
$24 (38)
Phillips
$0.09 (88)
Pottawatomie
$23.9 (39)
Pratt
$12.2 (55)
Rawlins
$32.2 (30)
Reno
0
Republic
$63 (15)
Rice
$1.2 (81)
Riley
$155.8 (4)
Rooks
$48 (19)
Rush
$158.8 (3)
Russell
$5.9 (66)
Saline
$55.1 (17)
Scott
$10.3 (61)
Sedgwick
$28.2 (34)
Seward
0
Shawnee
$21.7 (42)
Sheridan
$0.4 (84)
Sherman
0
Smith
$101.7 (10)
Stafford
$30.9 (31)
Stanton
$52.3 (18)
Stevens
$30.2 (32)
Sumner
$21.9 (41)
Thomas
$55.4 (16)
Trego
$3.1 (74)
Wabaunsee
$8.1 (63)
Wallace
0
Washington
$3 (75)
Wichita
$11.4 (59)
Wilson
$38 (22)
Woodson
0
Wyandotte
Map 7
County-by-County Value of Oil Production (and Rank) in 2011, $Millions
$1.2 (36)
Allen
0
Anderson
0
Atchison
$78 (5)
Barber
$1 (38)
Barton
$0.05 (52)
Bourbon
0
Brown
0
Butler
$0.6 (41)
Chase
$1.9 (31)
Chautauqua
0
Cherokee
$16.3 (18)
Cheyenne
$9.6 (21)
Clark
0
Clay
0
Cloud
$0 (50)
Coffey
$18 (17)
Comanche
$0.2 (45)
Cowley
$0.03 (54)
Crawford
0
Decatur
0
Dickinson
0
Doniphan
0
Douglas
$5.7 (24)
Edwards
$0 (51)
Elk
0
Ellis
$1 (37)
Ellsworth
$69.8 (7)
Finney
$9.2 (22)
Ford
0
Franklin
0
Geary
0
Gove
0
Graham
$116.5 (2)
Grant
$1 (39)
Gray
$8 (23)
Greeley
0
Greenwood
$21.1 (14)
Hamilton
$18.3 (16)
Harper
$1.3 (35)
Harvey
$80.5 (4)
Haskell
0
Hodgeman
0
Jackson
0
Jefferson
0
Jewell
$0.1 (49)
Johnson
$102.7 (3)
Kearny
$26 (13)
Kingman
$10.4 (20)
Kiowa
$16.2 (19)
Labette
0
Lane
$0.2 (47)
Leavenworth
0
Lincoln
0
Linn
0
Logan
0
Lyon
$1.4 (34)
Marion
0
Marshall
$0.5 (43)
Mcpherson
$19.2 (15)
Meade
$0.5 (42)
Miami
0
Mitchell
$41.4 (11)
Montgomery
0
Morris
$71.3 (6)
Morton
0
Nemaha
$43.1 (9)
Neosho
0
Ness
0
Norton
0
Osage
0
Osborne
0
Ottawa
$2.8 (27)
Pawnee
0
Phillips
0
Pottawatomie
$3.8 (26)
Pratt
0
Rawlins
$2.6 (28)
Reno
0
Republic
$2.3 (29)
Rice
0
Riley
0
Rooks
$0.7 (40)
Rush
0
Russell
0
Saline
$1.5 (33)
Scott
$0.04 (53)
Sedgwick
$54.4 (8)
Seward
0
Shawnee
0
Sheridan
$4.1 (25)
Sherman
0
Smith
$1.8 (32)
Stafford
$42.9 (10)
Stanton
$158.8 (1)
Stevens
$2.3 (30)
Sumner
0
Thomas
0
Trego
0
Wabaunsee
$0.2 (48)
Wallace
0
Washington
$0.2 (46)
Wichita
$40.7 (12)
Wilson
$0.3 (44)
Woodson
0
Wyandotte
Key
$0.0 to $1.0
$1.0 to $25.0
$25.0 to $50.0
More than $50.0
Map 8
County-by-County Value of Gas Production (and Rank) in 2011, $Millions
Source: Kansas Geological Survey; Independent Oil & Gas Services (Red Top News)
66
would change the Kansas rank among the listed states
to 10th from 15th.
Map 7 and Map 8 report the county-by-county distribu-
tion of oil and gas value for the 2011 production year.
Note from Map 8 the prominence of gas production
from the Cherokee Basin coalbeds in the southeast. (See
Tables B8, B9, B10, and B11 in Appendix B for historical
data on county-level oil and gas production.)
THE OVERALL OIL AND GAS VALUE CHAIN IN
KANSAS
The upstream sector is a key wealth-creating sector of
the Kansas economy. However, the oil and gas indus-
try represents more to the Kansas economy than just
the contribution of the upstream sector. Exhibit 7
illustrates the broader oil and gas value chain, and docu-
ments the average annual economic contribution to the
Kansas economy made by each component. Oil and gas
resources form the foundation for many products and
service businesses. In turn, the jobs and correspond-
ing income derived from the production of products
and service made possible by oil and gas helps support
a broad array of economic opportunities across many
dozens of non-oil-and-gas-related industry sectors in
the state of Kansas.
This report defnes the upstream sector as: development
of oil and gas feld properties (extraction), specialists in
the drilling of oil and gas wells, all non-drilling support
activities associated with the stewardship of safe and
productive oil and gas properties, the construction of
oil and gas pipelines, and the transportation by pipeline
of oil and gas. The categories correspond to specifc
industry codes used by the government to track eco-
nomic activity. The employment count includes owners
77
Oil & Gas
Extraction
Jobs: 8,954
Payroll: $681.7
Indirect Jobs:
12,108
Indirect Payroll:
$445.9
Taxes: $419.6
Oil & Gas
Well Drilling
Specialists
Jobs: 1,322
Payroll: $70.9
Indirect Jobs: 1,530
Indirect Payroll: $62.7
Taxes: $14.9
Non-Drilling
Oil & Gas
Support
Services
Jobs: 3,478
Payroll: $187.7
Indirect Jobs: 4,223
Indirect Payroll: $167.6
Taxes: $37.5
Pipelines Trucking (V.C. Related) Railroads (V.C. Related)
Petroleum
Refining
Jobs: 1,519
Payroll: $139.4
Indirect Jobs: 16,318
Indirect Payroll: $878.1
Taxes: $115.2
Pipeline
Construction
Jobs: 1,160
Payroll: $76.7
Indirect Jobs: 863
Indirect Payroll: $50.9
Taxes: $12.6
Lubricants
Manufacturing
Jobs: 199
Payroll: $14.9
Indirect Jobs: 1,359
Indirect Payroll: $50.7
Taxes: $7.8
Asphalt-Based
Products
Manufacturing
Jobs: 461
Payroll: $27.3
Indirect Jobs: 2,202
Indirect Payroll: $78.0
Taxes: $12.5
Natural Gas
Distribution
Jobs: 1,807
Payroll: $144.2
Indirect Jobs: 2,347
Indirect Payroll: $81.9
Taxes: $22.7
Industrial Gas &
Nitrogen Fertilizer
Manufacturing
Jobs: 420
Payroll: $32.6
Indirect Jobs: 2,073
Indirect Payroll: $92.6
Taxes: $11.4
Gas-Powered
Electricity
Jobs: 272
Payroll: 27.4
Indirect Jobs: 334
Indirect Payroll: $20.1
Taxes: $5.4
Fuel
Dealers
Jobs: 800
Payroll: $43.1
Indirect Jobs: 101
Indirect Payroll: $5.6
Taxes: $4.8
Gasoline
Stations
Jobs: 11,248
Payroll: $253.9
Indirect Jobs: 4,056
Indirect Payroll: $139.8
Taxes: $495.0
Industrial,
Commercial,
Household
Consumers
Jobs: 1,340
Payroll: $135.5
Indirect Jobs: 2,915
Indirect Payroll: $122.3
Taxes: $26.0
Jobs: 17,609
Payroll: $1,052.8
Indirect Jobs: 14,196
Indirect Payroll: $634.9
Taxes: $214.2
Jobs: 403
Payroll: $49.8
Indirect Jobs: 622
Indirect Payroll: $31.8
Taxes: $39.3
Petroleum
Merchant
Wholesalers
Jobs: 1,621
Payroll: $112.1
Indirect Jobs: 1,524
Indirect Payroll: $60.4
Taxes: $17.2
Exhibit 7: A Representation of the Oil and Gas Value Chain for the State of Kansas
(Average Annual Economic Contribution from 1998 to 2010; Millions of 2010 Dollars)
Exhibit 7
A Representation of the Oil and Gas Value Chain for the State of Kansas
(Average Annual Economic Contribution from 1998 to 2010; Millions of 2010 Dollars)
67
of non-employee businesses—the inclusion of which
makes a signifcant contribution to the overall count.
This report defnes the downstream sector as any busi-
ness sector in the value chain that is not part of the
upstream sector. Some analyses distinguish among the
upstream, midstream, and downstream, and, unlike this
report, typically put pipeline and certain other transpor-
tation activity in the “midstream” sector. Table B12 in
Appendix B provides more detail about the classifca-
tions and the associated jobs and payroll data.
Exhibit 8 provides a map of Kansas pipelines and refn-
ery locations.
Each component of Exhibit 7 lists fve items: Jobs,
Payroll, Indirect Jobs, Indirect Payroll, and Taxes. The
reported measures of these items constitute the annual
average levels from 1998 through 2010. The year
1998 marked a low point for oil prices and, coinciden-
tally, marks the year of a major change in the way the
government classifes industry sectors. Items reported
in dollars have been adjusted for infation, with 2010 as
the base year. Descriptions and summary charts related
to the fve different components in each box of Exhibit
7 follow.
The Jobs and Payroll items refect actual industry data
collected by the U.S. Bureau of Labor Statistics and the
U.S. Census Bureau. The Center for Applied Econom-
ics at the KU School of Business made special estima-
tions or data collection efforts in cases where data gaps
appeared or unique parts of an industry component
required a special focus.
Chart 34 and Chart 35 summarize the jobs and payroll
data from Exhibit 7. These represent the jobs and
payroll directly related to each of the specifc business
categories in the upstream and downstream sectors. The
Jobs and Payroll data have two components: businesses
with employees and businesses without employees. The
payroll estimated for the businesses with employees
D
D
D
McPherson Refinery
El Dorado Refinery
Coffeyville Refinery
Kansas Refineries with Pipelines
0 25 50 75 100 12.5
Miles
¯
D
Refinery
Oil or Gas Pipeline
29 August 2012
Exhibit 8
Kansas Refneries and Pipelines
68
$596.6
$1,523.5
$513.7
$416.1
$0
$500
$1,000
$1,500
$2,000
$2,500
Upstream Payroll Downstream Payroll
M
i
l
l
i
o
n
s
o
f
2
0
1
0
D
o
l
l
a
r
s
Employer Businesses Non-Employer Businesses
$1,110.3
$1,939.6
Chart 35
Avg. Annual Direct Payroll, Upstream & Downstream, 1998-2010
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau; Center for Applied Economics, KU School of Business
9,253
32,774
6,536
4,053
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Upstream Jobs Downstream Jobs
Employer Businesses Non-Employer Businesses
15,789
36,827
Chart 34
Avg. Annual Direct Jobs, Upstream & Downstream, 1998-2010
69
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Manufacturing
Informaton
Government
Constructon
Agriculture & Natural Resources
Other Services
Leisure & Hospitality
Finance and Real Estate
Educaton & Health Services
Professional & Business Services
Trade, Transportaton & Utlites
Upstream Indirect Upstream Induced Downstream Indirect Downstream Induced
4,918
2,427
2,416
1,606
1,045
736
9,537
7,434
Total = 17,546
6,488
11,802
Chart 37
Avg. Annual Indirect and Induced Jobs by Sector, Upstream & Downstream, 1998-2010
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau; IMPLAN; Center for Applied Economics, KU School of Business
6,536
712
938
1,722
2,611
1,107
1,538
457
168
4,053
2,756
5,333
7,021
5,490
3,363
4,603
2,363
1,845
0
2,000
4,000
6,000
8,000
10,000
12,000
Upstream Downstream
8,101
4,470
6,141
2,820
2,022
6,271
8,743
3,468
10,589
Chart 36
Avg. Annual Direct Jobs by Business Establishment Job Count, Upstream & Downstream, 1998-2010
70
includes estimates for fringe benefts, since that is a major
form of compensation. For the businesses without
employees, each business in a respective component of
the value chain counts as one job and the receipts of the
business count as “payroll.” Non-employee businesses
play a signifcant role in the upstream segment of the
industry: many of these businesses constitute the lessors
and royalty owners of the land and mineral rights. (The
items for Trucking and Railroads represent estimates
to account for the number of jobs and related payroll
specifcally interacting with the oil and gas value chain,
as represented in Exhibit 7.)
Chart 36 provides job estimates based on the size of the
business establishments involved. From a data presenta-
tion perspective, “establishments” differ from “frms.”
A large frm with thousands of employees may operate
a branch offce or production facility. Government
statisticians treat the branch as an establishment. That
said, most of the establishments represented by the data
in Chart 36 probably also qualify as stand-alone frms.
The Indirect Jobs and Indirect Payroll items in Exhibit
7 refect estimates made by using input-output analysis,
a traditional approach for conducting economic impact
evaluations. Input-output analysis uses the historical
pattern of industry-to-industry interactions to assess
how economic activity in one sector spills over to other
sectors.
The input-output analysis represented in Exhibit 7
relied on the databases and software developed by the
Minnesota IMPLAN Group, Inc. (www.implan.com).
IMPLAN is an industry standard because of the work
the frm does to make the data as current as possible.
IMPLAN generates two types of information in
response to economic impact investigations: (1) indirect
effects and (2) induced effects. Indirect effects measure
the economic activity related to the direct interaction
of one industry segment with another—for example,
the jobs and related payroll specifcally associated with
a business in the Oil & Gas Extraction sector hiring the
services of a frm in the Drilling sector. Induced effects,
$28.7
$109.0
$38.4
$189.6
$53.7
$83.1
$70.0
$87.3
$136.6
$212.5
$447.6
$0 $50 $100 $150 $200 $250 $300 $350 $400 $450
Other
Severance Tax
Residental Property Tax
Oil & Gas Property Tax
Personal Income Tax
Sales Tax
Motor Fuels
Upstream Downstream
Chart 38
Avg. Annual State and Local Taxes by Type Supported by the Upstream & Downstream Sectors, 1998-
2010, Millions 2010$
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau; IMPLAN; Center for Applied Economics, KU School of Business
71
in turn, measure the economic activity made possible by
the income earned by personnel in each of the sectors—
for example, the array of jobs supported by the income
spent by the families supported by jobs in the Oil &
Gas Extraction sector and the Drilling sector, like food,
clothing, housing, transportation, and entertainment.
Chart 37 provides a summary of the estimates, by sector,
for the indirect and induced jobs created by the upstream
and downstream business sectors. For convenience, the
“Indirect Jobs” and “Indirect Payroll” items listed in the
components of Exhibit 7 add together the indirect and
induced effects generated by the IMPLAN input-output
calculations. The IMPLAN analysis relies for its results
on the actual jobs and payroll data presented in Table
B12 of Appendix B.
The Taxes item in Exhibit 7 refects a large subset of
state- and local-level taxes. The estimates exclude only
two major categories of taxation: (1) corporate income
taxes and (2) commercial property taxes paid by busi-
nesses that do not face an explicit property tax levied
on lands with oil and gas resources. Corporate income
taxes and commercial property taxes—especially those
on many of the downstream businesses sectors—are
substantial omissions. However, there is no credible
way to make estimates of these taxes without having
widespread access to proprietary data.
Chart 38 summarizes the major taxes used in Exhibit 7.
Table B13 in Appendix B provides a more detailed list
of the taxes and Table B14 provides county-by-county
data on oil and gas related property taxes. With two
exceptions, each category of tax is estimated separately
based on the job count and take-home pay associated
with each upstream and downstream sector. Severance
Tax and Oil and Gas Property Tax are allocated to the Oil
and Gas Extraction sector. Motor Fuels Tax is allocated
to the Gasoline Stations sector.
A PRIMER ON THE KANSAS SEVERANCE TAX
(K.S.A 79-4217)
• Enacted in 1983. (The Kansas Supreme Court
ruled as invalid a 1957 version of a severance
tax.)
• The tax is levied on the gross value of oil and
gas at the time it is severed from the earth.
• The statutory tax rate equals eight percent. (A
property tax credit of 3.67 percent, per K.S.A.
79-4219, makes the effective severance tax rate
equal to 4.33 percent.)
• Seven percent of the severance tax is dedicated
to a Special County Mineral Production Tax
fund for counties and school districts in produc-
ing areas. The remaining 93 percent of the tax
is dedicated to the State General Fund.
Exemptions for Oil Wells:
• Oil wells of 2,000 feet or less that produce 5
barrels per day or less.
• Oil wells deeper than 2,000 feet, are allowed
exemptions according to the following schedule:
Price per Barrel Normal Exemption Water-Flood Exemption
More than $16.00 6 barrels/day or less 7 barrels/day or less
$15.01 to $16.00 67barrels/day or less 8 barrels/day or less
$14.01 to $15.00 8 barrels/day or less 9 barrels/day or less
$13.01 to $14.00 9 barrels/day or less 10 barrels/day or less
$13.00 or less 10 barrels/day or less 10 barrels/day or less
• All oil production from tertiary recovery
processes.
• All new pools discovered are exempt for the frst
two years, unless (as of July 1, 2012) the new
pool produces more than 50 barrels per day.
• All oil production from (certifed) 3-year inactive
wells for 10 years from the date of certifcation.
• All incremental oil produced from a “produc-
tion enhancement project” for 7 years following
the project start date.
Exemptions for Gas Wells:
• Gas wells that have an average daily production
value of less than $87.
• Gas used for the aid of gas production.
• Gas used for domestic or agricultural purposes.
• Prior to July 1, 2012, gas from a new pool for a
period of two years.
72
• All gas production from (certified) 3-year
inactive wells for 10 years from the date of
certifcation.
• All incremental gas produced from a “produc-
tion enhancement project” for 7 years following
the project start date.
A PRIMER ON KANSAS AD VALOREM TAXATION
OF OIL AND GAS PROPERTY
• The Kansas Constitution (Article 11) classifes
oil and gas leases (and all associated improve-
ments represented by a well and production
equipment) as tangible personal property.
• Like a home or business, appraisers estimated
a market value for a lease. The market value is
then assessed at 25 percent of market value for
oil leases that produce 5 barrels a day or less
and gas leases that produce 100,000 cubic feet
per day or less. Leases that produce more than
these thresholds are assessed at 30 percent of
appraised market value.
• Like a home or a business, the assessed value
of an oil or gas property are subject to the
property tax rates levied by all relevant jurisdic-
tions (e.g., city, county, school district, special
district, state).
• The appraised valuation of an oil or gas prop-
erty follows a multi-step process:
• The Kansas Department of Revenue’s Divi-
sion of Property Valuation annually sets the
price of oil for assessment purposes. It
also sets the price of natural gas (through a
process more complicated than that for oil).
During the annual price-setting process, the
Division of Property Valuation invites and
considers input from outside parties like
county appraisers, industry associations,
and other interested parties. The Division
uses standardized formulas to determine
a decline rate for the underground oil and
gas reserves associated with a well because
these reserves (in addition to the well and
the production equipment) create the tax
base: the tax applies to the value of oil or
gas in the ground.
• Once the Division of Property Valuation
sets a price for oil and gas to use for the
prospective tax year, it applied that price
to a well’s production rate less the expenses
incurred for that production. The net
fgure determines an income level for the
production.
• The income calculation, in turn, determines
the value of the oil or gas resources in the
ground. The property tax rate (millage rate)
levied by each taxing jurisdiction applies to
the calculated value.
• K.S.A. 79-201t exempts from property or ad
valorem taxes: “All oil leases, other than royalty
interests therein, the average daily production
from which is three barrels or less per producing
well, or fve barrels or less per producing well
which has a completion depth of 2,000 feet or
more.” This law took effect in the 1998 tax year.
73
Appendix A:
Technical Details of
Mississippian Lime Simulation
Model and Economic Impact
Estimates
The representative well forms the foundation for the
simulation model related to the potential economic
impact of the Mississippian Lime play. The represen-
tative well helps defne the workforce required to drill
and complete it, as well as defning a realistic production
profle to establish production-related income streams.
Data developed and reported for investors by Sandridge
Energy (February 2012), one of the prominent lease-
holders involved in the Mississippian Lime play, provided
the empirical basis for the representative well depicted
in Chart A1. The frst 600 days closely conforms to the
average experience Sandridge reports for its horizontal
Mississippian wells in Oklahoma and Kansas. Sandridge
offered 10-year present value estimates to its potential
investors, so the simulation uses the 10-year time frame
0
50
100
150
200
250
300
1 366 731 1,096 1,461 1,826 2,191 2,556 2,921 3,286
P
r
o
d
u
c
t
o
n
:
B
a
r
r
e
l
s
o
f
O
i
l
E
q
u
i
v
a
l
e
n
t
p
e
r
D
a
y
Number of Days
Chart A1
Production Profle of a Representative Horizontal Well
Related to the Mississippian Lime Play
Source: Sandridge Energy, Public Presentation; Center for Applied Economics, KU School of Business
to deplete the representative well. The decline pattern in
Chart A1 implies a well that will produce about 324,000
barrels of oil equivalent. Public statements by Sandridge
Energy offcials indicate that the average well produces
about 55 percent oil and 45 percent natural gas.
The economic impact estimates rely on the IMPLAN
input-output model (as described in the text of this
report related to the contribution of the oil and gas
industry to the Kansas economy). The inputs into the
IMPLAN model are:
• The number of workers required to drill and
complete a well;
• The number of construction-related workers
required to support a well;
• The transportation-related workers required to
support a well and its subsequent production
volumes;
74
• The per diem per worker spent in the hotel
and restaurant sectors by out-of-state (visiting)
workers;
• The income (defned as “proprietor” income)
generated as production royalties.
These inputs into the IMPLAN model generate “indi-
rect” job counts, “induced” job counts, labor income
derived from the job counts, and proprietor income
implied by the business activity supporting the job
counts.
Table A1
Estimated Potential Well Count by County, Select
Scenarios
Max
Square Wells Wells if Wells if
Miles @ 3 per 10% 18%
County (Sections) Section of Max of Max
Barber 1,134.1 3,402 340 612
Cheyenne 1,019.9 3,060 306 551
Clark 974.6 2,924 292 526
Comanche 788.3 2,365 236 426
Cowley 1,125.8 3,377 338 608
Edwards 621.9 1,866 187 336
Finney 1,302.0 3,906 391 703
Ford 1,098.3 3,295 329 593
Gove 1,071.7 3,215 322 579
Gray 868.9 2,607 261 469
Harper 801.3 2,404 240 433
Haskell 577.5 1,733 173 312
Hodgeman 860.0 2,580 258 464
Kingman 863.4 2,590 259 466
Kiowa 722.6 2,168 217 390
Lane 717.5 2,152 215 387
Logan 1,073.0 3,219 322 579
Meade 978.1 2,934 293 528
Ness 1,074.8 3,224 322 580
Pawnee 754.3 2,263 226 407
Pratt 735.1 2,205 221 397
Rawlins 1,069.4 3,208 321 577
Reno 1,255.4 3,766 377 678
Rush 717.8 2,153 215 388
Scott 717.5 2,153 215 387
Sedgwick 997.5 2,993 299 539
Sherman 1,056.1 3,168 317 570
Sumner 1,181.9 3,546 355 638
Thomas 1,074.7 3,224 322 580
Trego 889.5 2,668 267 480
Wallace 913.7 2,741 274 493
Wichita 718.6 2,156 216 388
The discussion in the simulation scenarios references
a projected total number of possible horizontal wells
implied by the geography identifed in Map 2 of the
report. The simulation does not incorporate this projec-
tion except to understand scenarios that might exceed the
projected maximum number of wells. To generate this
projection, industry representatives suggested using the
Barnett Shale geography and geology as an analog for
the Kansas Mississippian Lime. The counties roughly
defning the area of the Barnett Shale depicted in Exhibit
A1 comprise about 26,000 square miles. The “core”
area, colored in green, comprises about 2,650 square
miles (or 10 percent of the total). The core area plus
the pink-colored area comprises about 4,700 square miles
(or about 18 percent of the total).
Exhibit A1
Texas Counties that Help Defne the Geography
of the Barnett Shale
Source: http://www.worldoil.com/SHALE-ENERGY-Developing-
the-Barnett-Barnett-activity-continuing-despite-environmental-
tensions.html
The Kansas Mississippian Lime region depicted by the
county geography in Map 2 comprises 29,755 square
miles. Applying the Barnett Shale ratios to this area
implies a “productive” region of between 2,975 and
5,356 square miles.
The Barnett Shale region supports about three hori-
zontal wells per square mile (defned as a “section” by
the oil industry). Using this well count in the Kansas
Mississippian Lime context implies a projected range
of 8,925 to 16,068 potential wells. Table A1 provides
estimates of potential well count by county. Based on
the Barnett Shale-related assumptions, some counties
could conceivably experience the estimated maximum
count. All counties combined cannot.
75
Appendix B
Supplementary Data Tables
Well Avg Max
Count Depth Depth
Allen 12,044 846 5,168
Anderson 7,412 816 4,700
Atchison 125 1,984 3,136
Barber 6,628 4,659 9,342
Barton 15,732 3,414 5,090
Bourbon 3,239 626 6,428
Brown 78 3,087 5,772
Butler 13,850 2,351 6,841
Chase 1,110 1,516 4,625
Chautauqua 8,606 1,410 5,502
Cherokee 244 536 1,470
Cheyenne 1,108 2,552 5,803
Clark 1,924 5,515 8,060
Clay 114 2,189 3,664
Cloud 27 3,165 4,046
Coffey 3,086 1,347 4,222
Comanche 1,953 5,430 4,775
Cowley 10,227 2,916 4,573
Crawford 2,660 357 3,097
Decatur 1,718 3,770 5,033
Dickinson 505 2,540 3,550
Doniphan 42 1,968 3,400
Douglas 1,411 857 2,996
Edwards 2,290 4,494 6,070
Elk 3,148 1,593 4,133
Ellis 14,147 3,600 4,858
Ellsworth 3,387 3,228 5,360
Finney 3,542 3,909 7,044
Ford 977 5,013 6,752
Franklin 5,511 732 6,195
Geary 108 2,283 3,638
Gove 2,334 4,368 5,169
Graham 8,148 3,868 5,052
Grant 2,576 3,384 8,000
Gray 421 5,036 7,350
Greeley 900 4,017 5,994
Greenwood 11,233 2,024 5,684
Hamilton 1,157 3,030 6,690
Harper 2,792 4,557 9,060
Harvey 2,026 3,265 4,548
Haskell 3,292 4,505 7,650
Hodgeman 2,521 4,512 6,856
Jackson 138 3,078 3,992
Jefferson 782 1,622 3,615
Jewell 18 3,818 4,437
Johnson 3,428 847 5,370
Kearny 2,749 3,269 7,534
Kingman 4,532 4,172 5,975
Kiowa 2,551 4,829 9,069
Labette 4,022 721 6,250
Lane 2,628 4,558 5,700
Leavenworth 1,291 1,357 3,500
Lincoln 53 3,230 4,306
Linn 4,580 547 2,100
Logan 1,180 4,655 5,756
Well Avg Max
Count Depth Depth
Lyon 967 2,331 3,484
McPherson 5,504 3,130 6,955
Marion 4,419 2,577 4,613
Marshall 67 1,865 3,973
Meade 2,192 5,720 8,480
Miami 8,344 545 2,740
Mitchell 36 3,860 4,675
Montgomery 14,560 950 4,625
Morris 930 2,110 4,300
Morton 3,655 4,240 7,395
Nemaha 291 3,322 4,183
Neosho 10,132 767 8,270
Ness 6,651 4,397 6,795
Norton 1,219 3,675 4,560
Osage 108 1,880 3,808
Osborne 575 3,520 4,860
Ottawa 28 3,442 4,453
Pawnee 3,307 4,019 5,365
Phillips 1,844 3,485 4,152
Pottawatomie 126 2,437 3,790
Pratt 4,525 4,329 6,709
Rawlins 1,284 4,359 5,361
Reno 3,732 3,671 5,008
Republic 5 3,186 3,565
Rice 9,283 3,320 5,327
Riley 185 1,861 4,440
Rooks 9,037 3,539 5,860
Rush 3,086 3,780 4,802
Russell 12,027 3,164 4,209
Saline 1,488 3,055 5,433
Scott 1,138 4,449 6,432
Sedgwick 4,115 3,273 4,750
Seward 3,419 5,268 9,050
Shawnee 30 2,329 3,329
Sheridan 1,871 4,044 5,001
Sherman 477 2,530 5,913
Smith 34 3,622 4,800
Stafford 10,192 3,845 5,330
Stanton 1,653 4,119 7,507
Stevens 4,020 4,232 8,714
Sumner 6,202 3,567 6,651
Thomas 967 4,618 5,720
Trego 4,349 4,021 5,145
Wabaunsee 539 2,888 3,753
Wallace 433 4,794 6,058
Washington 22 3,270 11,300
Wichita 219 4,672 6,321
Wilson 7,898 1,036 3,352
Woodson 8,599 1,225 8,376
Wyandotte 96 588 1,428
Table B1
County-by-County Well Count, Average Well Depth, and Maximum Well Depth
Source: Kansas Geological Survey
76
Table B2
Total Wells Drilled by State (2005-2009)
Wells Drilled--Oil Wells Drilled--Gas Wells Drilled--Dry Hole
Exploratory Development Total Exploratory Development Total Exploratory Development Total
United States 3,852 59,484 63,336 10,098 124,835 134,933 6,609 14,604 21,214
Federal Offshore 20 614 634 100 1,034 1,134 551 488 1,039
Alabama 38 48 86 34 1,759 1,793 122 73 195
Alaska 5 620 625 10 67 77 48 26 74
Arizona - - - - - - 3 1 4
Arkansas 7 251 258 423 2,901 3,324 98 168 266
California 20 10,324 10,344 26 587 613 114 301 415
Colorado 19 287 306 375 13,572 13,947 215 368 583
Florida - 1 1 - - - - 1 1
Illinois 50 1,093 1,143 2 181 183 258 433 691
Indiana 36 254 290 86 124 210 139 126 265
Kansas 817 5,255 6,072 225 4,974 5,199 1,265 2,437 3,702
Kentucky 129 804 933 1,321 2,165 3,486 366 857 1,223
Louisiana 12 1,307 1,319 73 4,638 4,711 206 1,229 1,435
Maryland - - - - - - - - -
Michigan 40 157 197 23 1,707 1,730 106 157 263
Mississippi 10 338 348 33 639 672 133 178 311
Montana 483 733 1,216 235 1,799 2,034 168 143 311
Nebraska 30 74 104 32 229 261 116 107 223
Nevada - 1 1 - - - 13 1 14
New Mexico 118 2,844 2,962 167 4,884 5,051 124 268 392
New York 19 500 519 143 596 739 63 38 101
North Dakota 711 1,569 2,280 9 101 110 91 71 162
Ohio 64 1,205 1,269 268 1,894 2,162 57 158 215
Oklahoma 366 4,121 4,487 1,347 9,400 10,747 432 1,346 1,778
Oregon - - - - 4 4 - 1 1
Pennsylvania 338 4,144 4,482 2,582 10,517 13,099 61 202 263
South Dakota 10 83 93 11 20 31 25 4 29
Tennessee 15 138 153 306 183 489 41 235 276
Texas 339 20,978 21,325 892 35,352 36,244 1,907 5,080 6,987
Utah 94 1,312 1,406 197 2,601 2,798 95 111 206
Virginia - - - 81 2,689 2,770 - - -
West Virginia 9 147 156 964 6,448 7,412 24 69 93
Wyoming 63 732 795 206 14,467 14,673 175 301 476
Source: IHS Energy; Independent Petroleum Association of America
77
Table B3
Total Footage Drilled by State (2005-2009)
Footage Drilled--Oil Footage Drilled--Gas Footage Drilled--Dry Hole
(thousand feet) (thousand feet) (thous feet)
Exploratory Development Total Exploratory Development Total Exploratory Development Total
United States 27,496 274,710 302,206 60,163 815,630 875,793 39,265 71,532 110,796
Federal Offshore 293 6,706 6,999 913 10,467 11,379 6,849 4,256 11,105
Alabama 435 547 982 168 4,281 4,449 1,108 269 1,377
Alaska 57 3,814 3,871 88 567 654 313 163 475
Arizona - - - - - - 15 1 16
Arkansas 41 986 1,027 2,812 20,613 23,425 584 945 1,529
California 89 24,073 24,162 141 3,807 3,948 771 1,496 2,266
Colorado 117 1,886 2,003 2,072 88,333 90,404 976 1,662 2,599
Florida - 3 3 - - - - 1 1
Illinois 143 2,695 2,837 4 172 176 664 1,018 1,682
Indiana 86 462 548 195 158 353 271 214 485
Kansas 3,423 15,302 18,724 959 9,284 10,243 5,357 8,934 14,290
Kentucky 214 1,210 1,425 4,531 8,309 12,840 564 2,282 1,846
Louisiana 91 6,883 6,974 652 48,590 49,242 1,730 10,199 11,928
Maryland - - - - - - - - -
Michigan 193 631 825 126 2,824 2,950 407 421 829
Mississippi 103 2,619 2,721 198 5,342 5,540 1,108 1,453 2,561
Montana 5,288 6,814 12,102 529 2,811 3,340 802 410 1,213
Nebraska 133 362 495 98 576 675 523 461 984
Nevada - 5 5 - - - 72 6 78
New Mexico 554 17,698 18,252 1,262 28,675 29,937 673 1,554 2,227
New York 37 813 850 838 1,868 2,706 480 140 619
North Dakota 9,053 18,699 27,752 104 289 393 806 547 1,353
Ohio 249 4,745 4,994 1,112 7,222 8,334 211 609 821
Oklahoma 2,806 20,548 23,354 13,078 68,927 82,005 2,844 6,822 9,667
Oregon - - - - 12 12 - 2 2
Pennsylvania 705 7,434 8,138 12,250 41,417 53,667 232 584 816
South Dakota 87 504 591 23 35 57 55 29 83
Tennessee 35 222 257 1,260 660 1,920 79 394 473
Texas 2,297 121,471 123,768 8,188 344,768 352,956 14,694 29,002 43,696
Utah 664 8,214 8,878 1,714 22,327 24,041 662 346 1,008
Virginia 11 1,077 1,088 443 6,343 6,787 11 1,077 1,088
West Virginia 35 469 504 4,809 28,818 33,626 90 154 244
Wyoming 545 3,763 4,308 2,238 64,117 66,355 1,312 1,233 2,545
Source: IHS Energy; Independent Petroleum Association of America
78
Table B4
Average Cost per Foot Drilled; Average Cost per Well Drilled; and Total Cost of Drilling (2005-2009)
Cost of Drilling--Oil Cost of Drilling--Gas Cost of Drilling--Dry Hole
Total Cost Total Cost Total Cost
Cost/ft Cost/well (Thous$) Cost/ft Cost/well (Thous$) Cost/ft Cost/well (Thous$)
United States 419 2,009,323 128,775,385 477 3,232,661 413,141,606 424 2,195,226 43,844,218
Federal Offshore 4,288 47,112,743 27,626,444 4,524 44,777,715 40,923,378 4,093 41,910,020 40,705,520
Alabama 630 7,152,018 606,975 374 906,622 1,543,229 438 3,635,221 651,415
Alaska 3,884 24,093,765 14,432,679 2,392 18,902,859 1,416,550 3,279 21,590,133 1,554,075
Arizona - - - - - - 96 413,979 504,799
Arkansas 217 878,072 240,840 220 1,471,043 5,376,979 225 1,290,154 313,116
California 559 1,293,827 13,128,701 286 1,825,783 1,078,859 449 2,411,882 917,879
Colorado 348 2,286,894 803,604 560 3,823,343 47,278,190 308 1,389,780 638,637
Florida 607 1,844,078 9,220 - - - 402 443,879 2,219
Illinois 258 642,572 733,081 617 568,628 99,399 229 556,511 369,711
Indiana 261 486,032 156,981 776 1,688,308 334,921 283 516,811 139,335
Kansas 128 392,655 2,564,956 196 404,222 1,857,680 78 302,586 1,126,242
Kentucky 244 379,661 356,691 177 714,606 2,227,990 279 421,669 568,339
Louisiana 816 4,483,667 6,192,323 663 7,184,973 34,183,741 824 6,594,087 9,624,997
Maryland - - - - - - - - -
Michigan 583 2,400,493 513,491 693 1,260,323 1,918,863 427 1,389,546 325,554
Mississippi 564 4,310,296 1,626,952 684 6,335,002 3,238,746 564 4,860,291 1,418,552
Montana 530 5,008,041 5,576,520 356 609,663 1,139,712 519 2,123,228 593,690
Nebraska 304 1,475,997 161,844 327 902,035 237,813 300 1,460,512 288,419
Nevada 60 299,380 1,497 - - - 246 1,404,423 18,835
New Mexico 322 2,003,778 5,978,242 314 1,968,100 8,143,401 444 2,498,058 910,709
New York 223 355,536 188,509 236 900,916 614,126 432 2,713,979 265,732
North Dakota 571 6,950,072 17,994,897 980 6,224,508 274,114 471 4,035,444 610,704
Ohio 147 519,163 544,357 152 582,295 1,350,538 276 1,021,445 211,060
Oklahoma 272 1,419,833 6,720,967 407 3,318,881 31,681,369 279 1,455,099 2,380,510
Oregon - - - 230 694,330 7,847 85 188,845 944
Pennsylvania 213 383,788 1,789,771 213 973,165 10,692,170 330 921,055 125,888
South Dakota 530 3,637,975 313,524 490 790,788 29,584 376 1,347,888 33,998
Tennessee 256 396,305 50,536 159 637,024 295,765 273 448,928 109,616
Texas 322 1,894,661 42,024,011 500 4,969,537 175,377,913 388 2,441,203 16,000,010
Utah 300 1,934,648 2,709,893 712 6,113,567 16,417,083 604 2,991,069 524,663
Virginia - - - 197 582,900 1,601,315 - - -
West Virginia 168 584,580 66,486 179 892,748 5,644,956 258 771,322 63,934
Wyoming 515 2,638,014 2,137,931 802 4,120,516 52,491,971 706 3,677,468 1,621,014
Source: IHS Energy; Independent Petroleum Association of America
79
Table B5
Distribution of Drilling and Production Activity among Select “Major” Oil Companies and
Independent Companies
Cummulative Cummulative
Oil Gas Production Share of Share of
Well Share of Production (Thousand Oil Gas
Company Count Wells (Barrels) Cubic Feet) Production Production
Shell 919 0.22% n.a. n.a. n.a. n.a.
BP 289 0.07% 2,503,752 3,427,431,088 0.04% 8.69%
Oxy 2,783 0.67% 443,363,558 4,584,982,258 6.92% 11.62%
Anadarko 2,812 0.67% 13,635,658 2,551,023,293 0.21% 6.47%
Texaco* 1,089 0.26% 1,818,221 65,339,912 0.03% 0.17%
Chevron* 69 0.02% 40,078 103,561,440 0.00% 0.26%
Phillips* 1,840 0.44% n.a. n.a. n.a. n.a.
Conoco* 110 0.03% n.a. n.a. n.a. n.a.
Conoco-Phillips* 25 0.01% n.a. n.a. n.a. n.a.
Exxon-Mobil* 2,369 0.57% 605,067 3,953,598,384 0.01% 10.02%
Independent Producers 404,920 97.05% 5,944,144,189 24,757,128,867 92.79% 62.77%
Kansas Total (as of March 2012) 417,225 6,406,110,523 39,443,065,242
Note: Well count includes all wells throughout Kansas history in which the listed company was recorded as the “original operator.”
* Exxon-Mobil consolidates the pre-merger data because production data for Mobil was unavailable.
Before the merger, Exxon drilled 465 wells and Mobil drilled 1,904. Data for other merged companies are left unconsolidated to provide a
sense of history.
Source: Kansas Geological Survey
80
Table B6
State-by-State Oil Production
Production (Million Barrels) Rank Share of Total (Percent)
1981 1991 2001 2011 1981 1991 2001 2011 1981 1991 2001 2011
Alabama 20.7 18.6 9.3 8.3 17 15 15 15 0.6 0.7 0.4 0.4
Alaska* 615.8 710.9 431.0 219.3 2 1 1 3 19.1 25.3 19.3 10.5
Arizona 0.4 0.1 0.1 0.0 29 30 30 30 0.0 0.0 0.0 0.0
Arkansas 18.4 10.3 7.6 5.9 18 17 16 16 0.6 0.4 0.3 0.3
California** 424.0 374.3 308.7 225.5 3 3 3 2 13.2 13.3 13.9 10.8
Colorado 30.3 31.4 16.5 33.4 14 10 11 10 0.9 1.1 0.7 1.6
Florida 34.8 4.7 4.4 2.0 10 21 19 22 1.1 0.2 0.2 0.1
Illinois 24.1 19.1 10.1 9.3 16 14 14 14 0.7 0.7 0.5 0.4
Indiana 4.7 3.0 2.0 2.0 22 23 22 23 0.1 0.1 0.1 0.1
Kansas 65.8 56.9 33.9 41.9 8 8 8 9 2.0 2.0 1.5 2.0
Kentucky 6.5 5.5 3.0 2.4 21 20 20 20 0.2 0.2 0.1 0.1
Louisiana* 225.8 171.4 117.4 71.8 4 4 4 6 7.0 6.1 5.3 3.4
Michigan 32.7 17.5 7.4 5.1 12 16 17 18 1.0 0.6 0.3 0.2
Mississippi 34.2 27.1 19.5 23.6 11 11 10 12 1.1 1.0 0.9 1.1
Missouri 0.2 0.1 0.1 0.1 30 29 29 29 0.0 0.0 0.0 0.0
Montana 30.8 19.6 15.9 23.6 13 13 12 13 1.0 0.7 0.7 1.1
Nebraska 6.7 5.8 2.9 2.2 20 19 21 21 0.2 0.2 0.1 0.1
Nevada 0.7 3.4 0.6 0.4 28 22 26 26 0.0 0.1 0.0 0.0
New Mexico 71.6 70.4 68.0 70.6 7 7 6 7 2.2 2.5 3.1 3.4
New York 0.8 0.4 0.2 0.4 27 28 28 27 0.0 0.0 0.0 0.0
North Dakota 45.4 35.9 31.7 152.8 9 9 9 4 1.4 1.3 1.4 7.3
Ohio 13.6 9.2 6.1 5.2 19 18 18 17 0.4 0.3 0.3 0.2
Oklahoma 154.1 108.1 68.5 74.5 5 5 5 5 4.8 3.8 3.1 3.6
Pennsylvania 3.7 2.5 1.6 3.7 23 24 23 19 0.1 0.1 0.1 0.2
South Dakota 1.0 1.7 1.3 1.6 25 26 24 25 0.0 0.1 0.1 0.1
Tennessee 0.9 0.5 0.4 0.3 26 27 27 28 0.0 0.0 0.0 0.0
Texas* 934.0 685.1 425.2 521.5 1 2 2 1 29.0 24.4 19.1 24.9
Utah 25.9 24.5 15.3 25.8 15 12 13 11 0.8 0.9 0.7 1.2
Virginia 0.0 0.0 0.0 0.0 31 31 31 31 0.0 0.0 0.0 0.0
West Virginia 3.5 2.0 1.2 1.9 24 25 25 24 0.1 0.1 0.1 0.1
Wyoming 130.6 99.9 57.4 53.3 6 6 7 8 4.0 3.6 2.6 2.5
Total*** 3,224.0 2,811.5 2,227.7 2,096.1
* Includes offshore production
** Includes state and federal offshore production
*** Includes federal Gulf of Mexico offshore production
Source: Energy Information Administration
81
Table B7
State-by-State Natural Gas Marketed Production
Production (Million Cubic Feet) Rank Share of Total (Percent)
1981 1991 2001 2010 1981 1991 2001 2010 1981 1991 2001 2010
Alabama* 79,244 170,847 356,810 222,932 17 12 10 14 0.40 0.92 1.73 1.00
Alaska* 242,564 437,822 471,440 374,226 8 7 8 10 1.22 2.36 2.29 1.67
Arizona 187 1,225 307 183 29 26 29 30 0.00 0.01 0.00 0.00
Arkansas 92,986 164,702 166,804 926,638 15 13 14 7 0.47 0.89 0.81 4.14
California* 380,359 378,384 377,824 286,841 7 8 9 12 1.91 2.04 1.84 1.28
Colorado 195,706 285,961 817,206 1,578,379 9 9 6 5 0.98 1.54 3.97 7.05
Florida 32,470 4,884 5,710 12,409 21 23 23 23 0.16 0.03 0.03 0.06
Illinois 1,295 466 185 1,203 26 29 30 29 0.01 0.00 0.00 0.01
Indiana 330 232 1,064 6,802 28 30 28 24 0.00 0.00 0.01 0.03
Kansas 640,114 628,459 480,145 324,720 5 6 7 11 3.21 3.39 2.33 1.45
Kentuck 61,312 78,904 81,723 135,330 18 18 18 17 0.31 0.43 0.40 0.60
Louisiana* 6,780,184 5,034,361 1,502,086 2,210,099 2 2 4 3 33.98 27.17 7.30 9.87
Maryland 56 29 32 43 30 32 31 31 0.00 0.00 0.00 0.00
Michigan 152,593 195,749 275,036 151,886 12 11 12 15 0.76 1.06 1.34 0.68
Mississippi 181,238 108,031 107,541 73,721 10 17 16 21 0.91 0.58 0.52 0.33
Missouri 0 15 0 0 32 33 33 33 0.00 0.00 0.00 0.00
Montana 56,565 51,999 81,397 87,539 19 20 19 18 0.28 0.28 0.40 0.39
Nebraska 2,519 784 1,208 2,231 24 28 25 26 0.01 0.00 0.01 0.01
Nevada 0 53 7 4 32 31 32 32 0.00 0.00 0.00 0.00
New Mexico 1,132,066 1,038,284 1,689,125 1,292,185 4 4 2 6 5.67 5.60 8.21 5.77
New York 16,074 22,777 27,787 35,813 22 21 22 22 0.08 0.12 0.14 0.16
North Dakota 42,573 53,479 54,732 81,837 20 19 21 19 0.21 0.29 0.27 0.37
Ohio 141,134 147,651 100,107 78,122 13 15 17 20 0.71 0.80 0.49 0.35
Oklahoma 2,019,199 2,153,852 1,615,384 1,827,328 3 3 3 4 10.12 11.62 7.85 8.16
Oregon 5 2,741 1,110 1,407 31 24 26 28 0.00 0.01 0.01 0.01
Pennsylvania 122,454 152,500 130,853 572,902 14 14 15 8 0.61 0.82 0.64 2.56
South Dakota 1,155 882 1,100 1,862 27 27 27 27 0.01 0.00 0.01 0.01
Tennessee 1,719 1,856 2,000 5,144 25 25 24 25 0.01 0.01 0.01 0.02
Texas* 6,910,021 6,280,654 5,282,723 6,715,294 1 1 1 1 34.63 33.89 25.68 29.98
Utah 91,191 144,817 283,913 432,045 16 16 11 9 0.46 0.78 1.38 1.93
Virginia 8,903 14,906 71,543 147,255 23 22 20 16 0.04 0.08 0.35 0.66
West Virginia 161,251 198,605 191,889 265,174 11 10 13 13 0.81 1.07 0.93 1.18
Wyoming 408,356 776,528 1,363,879 2,305,525 6 5 5 2 2.05 4.19 6.63 10.29
Total** 19,955,823 18,532,439 20,570,293 22,402,141
* Includes state and federal offshore production
** Includes federal Gulf of Mexico offshore production
Source: Energy Information Administration (2011 data unavailable)
82
Table B8
County-by-County Oil Production (Barrels)
1950 1960 1970 1980 1990 2000 2010
Allen 29,940 1,012,122 570,796 664,014 512,567 220,231 216,161
Anderson 12,480 433,170 243,408 292,526 430,464 200,118 186,616
Atchison 0 0 0 0 0 0 0
Barber 1,139,892 1,399,886 806,203 964,249 910,886 473,796 1,822,698
Barton 19,424,231 10,245,807 5,628,888 3,752,180 2,861,812 1,600,501 2,193,822
Bourbon 24,342 28,338 123,561 84,610 149,396 40,208 57,374
Brown 5,579 0 4,043 5,953 2,601 0 0
Butler 6,862,459 7,799,582 3,782,978 2,701,731 2,156,498 1,277,899 1,124,699
Chase 37,594 103,734 64,015 38,944 24,111 39,912 30,190
Chautauqua 812,156 866,298 537,780 736,635 545,902 238,409 240,953
Cherokee 0 0 0 0 0 0 0
Cheyenne 0 13,919 0 88,628 61,063 75,936 91,045
Clark 0 196,649 100,066 791,520 425,012 125,679 431,389
Clay 0 10,340 0 0 0 2,500 3,789
Cloud 0 0 0 0 0 0 0
Coffey 107,394 100,672 131,708 375,093 185,116 137,456 222,062
Comanche 0 23,117 126,069 374,555 387,667 326,812 284,821
Cowley 1,908,243 3,672,337 2,231,547 2,113,902 1,174,762 470,553 444,809
Crawford 59,592 40,751 53,479 34,142 34,449 18,253 28,434
Decatur 0 376,531 662,830 464,187 269,100 130,423 288,124
Dickinson 162,132 62,005 36,940 25,369 30,165 14,501 8,889
Doniphan 0 0 0 0 0 0 0
Douglas 4,000 42,981 28,383 59,140 80,773 36,632 53,030
Edwards 15,009 777,673 235,867 841,415 468,072 203,564 172,008
Elk 182,408 226,278 170,399 229,381 196,343 76,333 63,739
Ellis 11,077,013 11,231,495 7,268,850 4,845,947 4,092,086 2,761,998 3,290,648
Ellsworth 4,149,448 1,654,791 1,291,662 737,699 543,132 325,931 276,772
Finney 215,621 361,396 1,316,296 1,190,724 1,626,570 2,427,038 1,672,361
Ford 0 8,444 27,440 14,720 114,394 75,802 362,909
Franklin 278,804 333,974 112,437 249,786 230,430 97,066 110,533
Geary 0 0 1,752 1,341 2,065 1,376 4,033
Gove 0 10,253 196,606 729,550 999,354 451,447 997,889
Graham 2,131,272 6,116,015 3,968,135 2,080,176 1,957,195 922,742 1,552,681
Grant 0 10,181 134,218 151,085 831,228 304,161 496,259
Gray 0 0 0 259,129 132,156 101,539 92,717
Greeley 0 0 0 89,628 353,707 184,831 199,000
Greenwood 5,375,676 4,758,538 2,158,024 1,177,233 935,594 596,150 465,196
Hamilton 0 13,225 3,380 1,626 4,810 334 0
Harper 7,445 1,212,124 887,487 611,442 455,303 306,196 361,448
Harvey 184,531 677,006 888,848 368,218 201,792 134,502 121,756
Haskell 0 2,427,089 1,247,076 639,789 1,316,196 2,397,757 2,006,044
Hodgeman 13,572 406,519 1,271,815 790,407 638,181 398,401 429,451
Jackson 0 0 15,398 0 6,226 0 1,438
Jefferson 50,532 0 0 0 66,613 21,547 19,423
Jewell 0 0 0 0 0 0 0
Johnson 0 5,235 21,975 18,851 234,277 168,286 158,529
Kearny 28,886 76,337 139,807 311,702 502,515 337,118 273,276
Kingman 147,904 3,174,208 2,701,878 1,214,277 742,989 466,910 628,111
Kiowa 8,275 827,953 735,796 743,807 585,580 334,064 268,550
Labette 6,922 109,598 24,059 55,109 36,140 10,867 8,253
Lane 0 0 38,672 768,254 922,170 546,922 931,892
Leavenworth 10,722 0 1,324 1,824 206,869 81,564 62,793
Lincoln 0 0 0 0 0 0 0
Linn 56,739 67,303 35,242 33,683 213,127 71,304 86,638
Logan 0 3,902 18,527 235,368 232,678 254,805 701,702
Lyon 353,959 157,160 175,609 99,197 66,243 19,656 9,470
McPherson 3,477,164 3,502,798 1,740,988 1,198,459 799,671 455,463 420,551
Marion 595,126 3,297,420 614,816 408,950 296,158 154,741 144,803
Marshall 0 0 0 0 0 0 0
Meade 0 1,018,572 643,190 377,565 493,364 194,388 428,716
Miami 492,171 406,792 119,914 315,101 268,341 137,335 126,839
Mitchell 0 0 0 0 0 0 0
Montgomery 785,932 494,293 300,615 487,564 422,449 99,025 133,352
Morris 26,328 425,022 277,407 188,485 147,818 102,751 62,269
Morton 186 1,340,515 2,506,478 1,516,121 1,650,650 512,880 567,385
Nemaha 13,193 10,046 6,662 6,596 193,074 58,470 48,880
Neosho 615,792 488,212 269,568 297,415 155,244 48,025 28,773
Ness 276,327 594,957 2,487,620 2,215,749 2,264,434 1,473,415 1,921,879
83
Table B8 (continued)
County-by-County Oil Production (Barrels)
1950 1960 1970 1980 1990 2000 2010
Norton 48,295 882,145 546,909 331,496 192,930 100,883 202,837
Osage 0 0 0 15,261 918 642 1,911
Osborne 0 67,016 39,307 156,605 141,133 142,062 148,282
Ottawa 0 0 0 0 0 0 0
Pawnee 454,552 1,301,585 990,910 515,169 386,314 142,944 189,037
Phillips 2,225,857 1,913,264 1,923,650 1,090,842 771,794 456,639 306,251
Pottawatomie 0 0 0 0 1,512 3,174 958
Pratt 2,074,004 1,842,829 1,393,901 687,915 1,094,989 397,346 331,182
Rawlins 0 545,415 667,076 458,013 439,254 175,117 184,901
Reno 2,014,875 777,917 1,032,993 813,340 707,811 555,692 425,931
Republic 0 0 0 0 0 0 0
Rice 8,656,838 4,474,824 4,482,784 1,585,949 1,368,586 780,538 801,180
Riley 0 212,235 101,751 51,606 66,488 26,629 18,011
Rooks 5,759,190 5,634,607 4,216,198 2,672,803 3,168,872 1,632,813 2,008,081
Rush 473,307 301,081 1,110,960 416,226 491,004 221,014 392,920
Russell 13,561,393 8,336,647 6,825,538 4,105,021 3,374,653 1,989,818 1,993,685
Saline 361,030 648,244 347,801 177,669 129,319 71,693 65,720
Scott 50,737 49,423 165,870 108,696 174,034 361,349 662,699
Sedgwick 1,317,395 2,281,774 1,127,662 491,875 302,505 156,542 129,088
Seward 14,176 55,668 955,023 904,219 1,477,078 739,965 380,333
Shawnee 0 0 0 0 0 0 0
Sheridan 421,193 447,956 674,469 276,550 313,703 135,095 341,786
Sherman 0 0 12,859 20,478 8,179 4,431 5,658
Smith 0 0 0 0 0 0 0
Stafford 5,296,899 5,737,031 3,572,135 2,115,411 2,185,220 1,168,549 1,292,724
Stanton 0 31,107 18,732 59,063 476,453 361,505 327,164
Stevens 0 9,170 1,075,804 142,233 616,348 659,761 678,837
Sumner 1,314,572 3,070,483 1,689,124 1,138,696 874,981 509,851 416,571
Thomas 0 1,944 11,896 149,669 364,418 184,905 212,966
Trego 89,902 1,584,441 1,571,495 994,802 900,124 463,143 758,758
Wabaunsee 356,215 280,239 311,280 189,346 111,786 60,412 39,963
Wallace 0 0 0 2,580 266,953 251,161 88,401
Washington 0 0 0 0 0 0 0
Wichita 0 0 2,086 31,980 30,435 64,278 45,894
Wilson 71,005 197,080 173,446 285,161 208,177 112,425 120,440
Woodson 624,366 803,162 863,104 811,803 691,906 493,232 457,433
Wyandotte 0 0 0 0 90 0 0
State Total 107,339,000 113,344,548 85,093,294 59,871,228 57,185,549 35,174,434 40,467,479
Note: The sum of county totals do not add to state total for 1950 and 1960.
Source: Kansas Geological Survey
84
Table B9
County-by-County Share of Oil Production (State Totals in Barrels)
1950 1960 1970 1980 1990 2000 2010
Allen 0.03% 0.89% 0.67% 1.11% 0.90% 0.63% 0.53%
Anderson 0.01% 0.38% 0.29% 0.49% 0.75% 0.57% 0.46%
Atchison 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Barber 1.07% 1.23% 0.95% 1.61% 1.59% 1.35% 4.50%
Barton 18.26% 8.98% 6.61% 6.27% 5.00% 4.55% 5.42%
Bourbon 0.02% 0.02% 0.15% 0.14% 0.26% 0.11% 0.14%
Brown 0.01% 0.00% 0.00% 0.01% 0.00% 0.00% 0.00%
Butler 6.45% 6.83% 4.45% 4.51% 3.77% 3.63% 2.78%
Chase 0.04% 0.09% 0.08% 0.07% 0.04% 0.11% 0.07%
Chautauqua 0.76% 0.76% 0.63% 1.23% 0.95% 0.68% 0.60%
Cherokee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cheyenne 0.00% 0.01% 0.00% 0.15% 0.11% 0.22% 0.22%
Clark 0.00% 0.17% 0.12% 1.32% 0.74% 0.36% 1.07%
Clay 0.00% 0.01% 0.00% 0.00% 0.00% 0.01% 0.01%
Cloud 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Coffey 0.10% 0.09% 0.15% 0.63% 0.32% 0.39% 0.55%
Comanche 0.00% 0.02% 0.15% 0.63% 0.68% 0.93% 0.70%
Cowley 1.79% 3.22% 2.62% 3.53% 2.05% 1.34% 1.10%
Crawford 0.06% 0.04% 0.06% 0.06% 0.06% 0.05% 0.07%
Decatur 0.00% 0.33% 0.78% 0.78% 0.47% 0.37% 0.71%
Dickinson 0.15% 0.05% 0.04% 0.04% 0.05% 0.04% 0.02%
Doniphan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Douglas 0.00% 0.04% 0.03% 0.10% 0.14% 0.10% 0.13%
Edwards 0.01% 0.68% 0.28% 1.41% 0.82% 0.58% 0.43%
Elk 0.17% 0.20% 0.20% 0.38% 0.34% 0.22% 0.16%
Ellis 10.42% 9.84% 8.54% 8.09% 7.16% 7.85% 8.13%
Ellsworth 3.90% 1.45% 1.52% 1.23% 0.95% 0.93% 0.68%
Finney 0.20% 0.32% 1.55% 1.99% 2.84% 6.90% 4.13%
Ford 0.00% 0.01% 0.03% 0.02% 0.20% 0.22% 0.90%
Franklin 0.26% 0.29% 0.13% 0.42% 0.40% 0.28% 0.27%
Geary 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Gove 0.00% 0.01% 0.23% 1.22% 1.75% 1.28% 2.47%
Graham 2.00% 5.36% 4.66% 3.47% 3.42% 2.62% 3.84%
Grant 0.00% 0.01% 0.16% 0.25% 1.45% 0.86% 1.23%
Gray 0.00% 0.00% 0.00% 0.43% 0.23% 0.29% 0.23%
Greeley 0.00% 0.00% 0.00% 0.15% 0.62% 0.53% 0.49%
Greenwood 5.05% 4.17% 2.54% 1.97% 1.64% 1.70% 1.15%
Hamilton 0.00% 0.01% 0.00% 0.00% 0.01% 0.00% 0.00%
Harper 0.01% 1.06% 1.04% 1.02% 0.80% 0.87% 0.89%
Harvey 0.17% 0.59% 1.04% 0.62% 0.35% 0.38% 0.30%
Haskell 0.00% 2.13% 1.47% 1.07% 2.30% 6.82% 4.96%
Hodgeman 0.01% 0.36% 1.49% 1.32% 1.12% 1.13% 1.06%
Jackson 0.00% 0.00% 0.02% 0.00% 0.01% 0.00% 0.00%
Jefferson 0.05% 0.00% 0.00% 0.00% 0.12% 0.06% 0.05%
Jewell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Johnson 0.00% 0.00% 0.03% 0.03% 0.41% 0.48% 0.39%
Kearny 0.03% 0.07% 0.16% 0.52% 0.88% 0.96% 0.68%
Kingman 0.14% 2.78% 3.18% 2.03% 1.30% 1.33% 1.55%
Kiowa 0.01% 0.73% 0.86% 1.24% 1.02% 0.95% 0.66%
Labette 0.01% 0.10% 0.03% 0.09% 0.06% 0.03% 0.02%
Lane 0.00% 0.00% 0.05% 1.28% 1.61% 1.56% 2.30%
Leavenworth 0.01% 0.00% 0.00% 0.00% 0.36% 0.23% 0.16%
Lincoln 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Linn 0.05% 0.06% 0.04% 0.06% 0.37% 0.20% 0.21%
Logan 0.00% 0.00% 0.02% 0.39% 0.41% 0.72% 1.73%
Lyon 0.33% 0.14% 0.21% 0.17% 0.12% 0.06% 0.02%
McPherson 3.27% 3.07% 2.05% 2.00% 1.40% 1.30% 1.04%
Marion 0.56% 2.89% 0.72% 0.68% 0.52% 0.44% 0.36%
Marshall 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Meade 0.00% 0.89% 0.76% 0.63% 0.86% 0.55% 1.06%
Miami 0.46% 0.36% 0.14% 0.53% 0.47% 0.39% 0.31%
Mitchell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Montgomery 0.74% 0.43% 0.35% 0.81% 0.74% 0.28% 0.33%
Morris 0.02% 0.37% 0.33% 0.31% 0.26% 0.29% 0.15%
Morton 0.00% 1.17% 2.95% 2.53% 2.89% 1.46% 1.40%
Nemaha 0.01% 0.01% 0.01% 0.01% 0.34% 0.17% 0.12%
Neosho 0.58% 0.43% 0.32% 0.50% 0.27% 0.14% 0.07%
Ness 0.26% 0.52% 2.92% 3.70% 3.96% 4.19% 4.75%
85
Table B9 (continued)
County-by-County Share of Oil Production (State Totals in Barrels)
1950 1960 1970 1980 1990 2000 2010
Norton 0.05% 0.77% 0.64% 0.55% 0.34% 0.29% 0.50%
Osage 0.00% 0.00% 0.00% 0.03% 0.00% 0.00% 0.00%
Osborne 0.00% 0.06% 0.05% 0.26% 0.25% 0.40% 0.37%
Ottawa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pawnee 0.43% 1.14% 1.16% 0.86% 0.68% 0.41% 0.47%
Phillips 2.09% 1.68% 2.26% 1.82% 1.35% 1.30% 0.76%
Pottawatomie 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00%
Pratt 1.95% 1.61% 1.64% 1.15% 1.91% 1.13% 0.82%
Rawlins 0.00% 0.48% 0.78% 0.76% 0.77% 0.50% 0.46%
Reno 1.89% 0.68% 1.21% 1.36% 1.24% 1.58% 1.05%
Republic 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rice 8.14% 3.92% 5.27% 2.65% 2.39% 2.22% 1.98%
Riley 0.00% 0.19% 0.12% 0.09% 0.12% 0.08% 0.04%
Rooks 5.42% 4.94% 4.95% 4.46% 5.54% 4.64% 4.96%
Rush 0.45% 0.26% 1.31% 0.70% 0.86% 0.63% 0.97%
Russell 12.75% 7.30% 8.02% 6.86% 5.90% 5.66% 4.93%
Saline 0.34% 0.57% 0.41% 0.30% 0.23% 0.20% 0.16%
Scott 0.05% 0.04% 0.19% 0.18% 0.30% 1.03% 1.64%
Sedgwick 1.24% 2.00% 1.33% 0.82% 0.53% 0.45% 0.32%
Seward 0.01% 0.05% 1.12% 1.51% 2.58% 2.10% 0.94%
Shawnee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Sheridan 0.40% 0.39% 0.79% 0.46% 0.55% 0.38% 0.84%
Sherman 0.00% 0.00% 0.02% 0.03% 0.01% 0.01% 0.01%
Smith 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Stafford 4.98% 5.03% 4.20% 3.53% 3.82% 3.32% 3.19%
Stanton 0.00% 0.03% 0.02% 0.10% 0.83% 1.03% 0.81%
Stevens 0.00% 0.01% 1.26% 0.24% 1.08% 1.88% 1.68%
Sumner 1.24% 2.69% 1.99% 1.90% 1.53% 1.45% 1.03%
Thomas 0.00% 0.00% 0.01% 0.25% 0.64% 0.53% 0.53%
Trego 0.08% 1.39% 1.85% 1.66% 1.57% 1.32% 1.87%
Wabaunsee 0.33% 0.25% 0.37% 0.32% 0.20% 0.17% 0.10%
Wallace 0.00% 0.00% 0.00% 0.00% 0.47% 0.71% 0.22%
Washington 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wichita 0.00% 0.00% 0.00% 0.05% 0.05% 0.18% 0.11%
Wilson 0.07% 0.17% 0.20% 0.48% 0.36% 0.32% 0.30%
Woodson 0.59% 0.70% 1.01% 1.36% 1.21% 1.40% 1.13%
Wyandotte 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
State Total 107,339,000 113,344,548 85,093,294 59,871,228 57,185,549 35,174,434 40,467,479
Source: Kansas Geological Survey
86
Table B10
County-by-County Gas Production (1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Allen 357,136 84,667 56,169 23,185 59,668 193,163 479,405
Anderson 0 0 0 7,773 19,953 0 0
Atchison 0 0 0 0 509,711 0 21,239
Barber 6,644,619 53,315,227 30,787,783 15,924,038 14,387,053 11,522,597 19,988,407
Barton 2,530,856 720,233 1,293,969 357,434 563,111 425,351 346,469
Bourbon 0 0 0 0 3,831 4,832 23,380
Brown 0 0 0 0 0 0 0
Butler 0 0 0 0 900 0 0
Chase 69,530 34,540 0 51,455 288,847 288,281 187,927
Chautauqua 134,660 102,454 2,300 239,784 589,357 695,686 583,593
Cherokee 0 0 0 0 0 0 0
Cheyenne 0 0 0 250,619 252,608 391,159 4,297,846
Clark 697,936 6,811,276 7,622,545 7,267,621 4,547,587 3,343,851 3,250,392
Clay 0 0 0 0 0 0 0
Cloud 0 0 0 0 0 0 0
Coffey 11,324 721 0 9,556 2,167 0 48,591
Comanche 0 0 10,269,579 11,433,163 7,936,788 9,896,846 5,462,113
Cowley 1,147,183 1,413,270 504,861 1,844,459 799,301 59,801 155,710
Crawford 45,124 28,651 0 5,217 0 0 25,041
Decatur 0 0 0 0 0 0 0
Dickinson 0 0 0 0 0 0 0
Doniphan 0 0 0 0 0 0 0
Douglas 0 0 0 0 3,337 0 0
Edwards 205,319 1,780,355 5,883,402 6,827,946 3,518,282 2,337,765 1,771,409
Elk 323,433 151,308 94,841 296,577 442,471 163,870 16,781
Ellis 0 0 0 0 0 3,935 0
Ellsworth 17,312 39,332 12,637 909,447 126,950 87,411 356,041
Finney 30,784,079 53,961,070 55,119,195 42,564,954 35,991,543 41,635,762 20,780,789
Ford 10,861 389,851 40,682 1,634,863 1,602,950 463,088 1,841,060
Franklin 0 0 0 129,909 76,733 5,320 7,837
Geary 0 0 0 0 0 0 0
Gove 0 0 0 0 0 0 0
Graham 0 0 0 0 0 0 0
Grant 84,403,364 91,748,893 166,553,679 103,571,719 107,170,799 77,263,890 34,728,185
Gray 0 0 0 0 99,741 97,513 292,578
Greeley 0 0 3,537 4,449,341 5,392,775 4,969,652 2,579,266
Greenwood 0 0 0 0 27,962 1,476 0
Hamilton 5,367,827 4,548,756 19,157,520 12,234,013 10,287,735 13,109,060 6,634,281
Harper 106,507 4,860,913 5,626,767 5,959,346 5,341,887 3,955,949 5,000,614
Harvey 432,415 339,089 394,861 1,872,721 519,500 265,328 246,127
Haskell 31,315,837 35,945,374 56,006,875 37,849,909 37,398,294 44,418,824 24,052,614
Hodgeman 0 0 0 0 56,754 37,098 0
Jackson 0 0 0 0 0 0 0
Jefferson 36,384 0 0 0 159,886 0 0
Jewell 0 0 0 0 0 0 0
Johnson 25,728 76,816 0 30,331 267,122 217,046 46,096
Kearny 71,955,888 69,931,846 127,193,423 88,603,826 58,305,831 65,609,222 30,875,353
Kingman 1,368,757 18,982,088 29,303,547 19,733,353 12,553,998 7,359,218 7,507,643
Kiowa 4,094 3,384,213 22,121,167 15,077,139 11,530,130 5,601,834 3,133,430
Labette 27,871 71,220 0 0 235,196 101,765 4,237,576
Lane 0 0 0 0 0 0 0
Leavenworth 18,545 4,225 0 0 1,585,820 124,877 85,619
Lincoln 0 0 0 0 0 0 0
Linn 10,635 0 0 0 45,215 14,834 0
Logan 0 0 0 0 0 0 0
Lyon 0 0 0 13,465 0 0 0
McPherson 0 260,320 577,449 1,449,044 495,928 189,537 123,168
Marion 108,986 988,700 1,169,913 1,642,677 1,061,074 593,867 448,539
Marshall 0 0 0 0 0 0 0
Meade 2,987,016 14,312,613 15,621,769 10,207,092 8,843,614 6,169,935 4,944,467
Miami 67,126 0 0 223 2,412 83,959 211,694
Mitchell 0 0 0 0 0 0 0
Montgomery 597,832 338,631 0 493,711 1,040,844 1,184,101 12,284,485
Morris 48,371 428,895 0 1,072,105 0 0 0
Morton 24,357,419 76,950,127 87,922,772 57,602,753 49,217,313 43,168,233 23,704,723
Nemaha 0 0 0 0 0 0 0
Neosho 129,315 117,744 668 345 69,513 151,271 12,940,892
Ness 0 0 0 0 0 0 0
87
Table B10 (continued)
County-by-County Gas Production (1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Norton 0 0 0 0 0 0 0
Osage 0 0 0 0 0 0 0
Osborne 0 0 0 0 0 0 0
Ottawa 0 0 0 0 0 0 0
Pawnee 3,146,047 2,869,283 3,438,583 3,049,770 2,093,986 1,235,647 677,891
Phillips 0 0 0 0 0 0 0
Pottawatomie 0 0 0 0 0 0 0
Pratt 2,323,599 1,364,422 1,037,314 6,757,066 3,345,701 1,620,755 2,887,566
Rawlins 0 0 0 0 0 0
Reno 448,918 3,963,203 1,892,149 1,368,771 872,434 1,362,340 781,789
Republic 0 0 0 0 0 0 0
Rice 377,030 458,170 683,006 1,321,201 1,220,114 560,177 647,512
Riley 0 0 0 0 0 0
Rooks 0 0 0 0 0 0
Rush 1,353,835 1,681,004 2,204,811 793,657 762,977 300,572 271,613
Russell 0 279,705 15,547 177,665 33,248 0 0
Saline 0 0 0 0 0 0 0
Scott 0 0 147,200 224,713 360,474 317,998 375,415
Sedgwick 558,751 16,375 0 383,471 66,911 19,871 11,293
Seward 26,997,298 33,009,597 39,723,417 27,536,072 34,734,682 31,836,473 17,177,937
Shawnee 0 0 0 0 0 0 0
Sheridan 0 0 0 0 0 0 0
Sherman 0 0 0 0 338,194 289,978 1,042,573
Smith 0 0 0 0 0 0 0
Stafford 1,161,615 1,149,863 1,372,098 1,220,554 1,320,616 1,060,411 562,713
Stanton 16,018,254 21,848,436 39,210,192 30,144,656 15,346,607 24,972,105 12,736,668
Stevens 101,239,764 122,005,132 165,782,609 166,614,937 147,874,199 122,221,338 48,801,747
Sumner 0 339,126 2,162,059 1,901,058 246,461 711,635 710,031
Thomas 0 0 0 0 0 0 0
Trego 0 0 0 0 0 0 0
Wabaunsee 0 0 0 0 0 0 0
Wallace 0 0 0 0 981 140,639 76,041
Washington 0 0 0 0 0 0 0
Wichita 0 0 0 0 152,413 104,365 74,211
Wilson 191,642 153,456 5,179 200,714 413,715 635,502 12,483,535
Woodson 11,824 6,774 1,375 1,079 123,082 43,181 109,700
Wyandotte 5,470 0 0 5,645 0 0
State Total 420,588,383 632,609,850 901,017,449 693,342,142 592,739,286 533,658,257 333,149,615
* The production from the Hugoton gas ?eld was not split among counties before 1953. The sum of county totals do not add to state total
for 1953 and 1960.
Source: Kansas Geological Survey
88
Table B11
County-by-County Share of Natural Gas Production (State Totals in 1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Allen 0.08% 0.01% 0.01% 0.00% 0.01% 0.04% 0.14%
Anderson 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Atchison 0.00% 0.00% 0.00% 0.00% 0.09% 0.00% 0.01%
Barber 1.58% 8.45% 3.42% 2.30% 2.43% 2.16% 6.00%
Barton 0.60% 0.11% 0.14% 0.05% 0.10% 0.08% 0.10%
Bourbon 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Brown 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Butler 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Chase 0.02% 0.01% 0.00% 0.01% 0.05% 0.05% 0.06%
Chautauqua 0.03% 0.02% 0.00% 0.03% 0.10% 0.13% 0.18%
Cherokee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cheyenne 0.00% 0.00% 0.00% 0.04% 0.04% 0.07% 1.29%
Clark 0.17% 1.08% 0.85% 1.05% 0.77% 0.63% 0.98%
Clay 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cloud 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Coffey 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Comanche 0.00% 0.00% 1.14% 1.65% 1.34% 1.85% 1.64%
Cowley 0.27% 0.22% 0.06% 0.27% 0.13% 0.01% 0.05%
Crawford 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Decatur 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Dickinson 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Doniphan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Douglas 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Edwards 0.05% 0.28% 0.65% 0.98% 0.59% 0.44% 0.53%
Elk 0.08% 0.02% 0.01% 0.04% 0.07% 0.03% 0.01%
Ellis 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Ellsworth 0.00% 0.01% 0.00% 0.13% 0.02% 0.02% 0.11%
Finney 7.33% 8.55% 6.12% 6.14% 6.07% 7.80% 6.24%
Ford 0.00% 0.06% 0.00% 0.24% 0.27% 0.09% 0.55%
Franklin 0.00% 0.00% 0.00% 0.02% 0.01% 0.00% 0.00%
Geary 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Gove 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Graham 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Grant 20.09% 14.53% 18.49% 14.94% 18.08% 14.48% 10.42%
Gray 0.00% 0.00% 0.00% 0.00% 0.02% 0.02% 0.09%
Greeley 0.00% 0.00% 0.00% 0.64% 0.91% 0.93% 0.77%
Greenwood 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Hamilton 1.28% 0.72% 2.13% 1.76% 1.74% 2.46% 1.99%
Harper 0.03% 0.77% 0.62% 0.86% 0.90% 0.74% 1.50%
Harvey 0.10% 0.05% 0.04% 0.27% 0.09% 0.05% 0.07%
Haskell 7.45% 5.69% 6.22% 5.46% 6.31% 8.32% 7.22%
Hodgeman 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.00%
Jackson 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Jefferson 0.01% 0.00% 0.00% 0.00% 0.03% 0.00% 0.00%
Jewell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Johnson 0.01% 0.01% 0.00% 0.00% 0.05% 0.04% 0.01%
Kearny 17.12% 11.08% 14.12% 12.78% 9.84% 12.29% 9.27%
Kingman 0.33% 3.01% 3.25% 2.85% 2.12% 1.38% 2.25%
Kiowa 0.00% 0.54% 2.46% 2.17% 1.95% 1.05% 0.94%
Labette 0.01% 0.01% 0.00% 0.00% 0.04% 0.02% 1.27%
Lane 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Leavenworth 0.00% 0.00% 0.00% 0.00% 0.27% 0.02% 0.03%
Lincoln 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Linn 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.00%
Logan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Lyon 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
McPherson 0.00% 0.04% 0.06% 0.21% 0.08% 0.04% 0.04%
Marion 0.03% 0.16% 0.13% 0.24% 0.18% 0.11% 0.13%
Marshall 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Meade 0.71% 2.27% 1.73% 1.47% 1.49% 1.16% 1.48%
Miami 0.02% 0.00% 0.00% 0.00% 0.00% 0.02% 0.06%
Mitchell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Montgomery 0.14% 0.05% 0.00% 0.07% 0.18% 0.22% 3.69%
Morris 0.01% 0.07% 0.00% 0.15% 0.00% 0.00% 0.00%
Morton 5.80% 12.19% 9.76% 8.31% 8.30% 8.09% 7.12%
Nemaha 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Neosho 0.03% 0.02% 0.00% 0.00% 0.01% 0.03% 3.88%
Ness 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
89
Table B11 (continued)
County-by-County Share of Natural Gas Production (State Totals in 1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Norton 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Osage 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Osborne 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Ottawa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pawnee 0.75% 0.45% 0.38% 0.44% 0.35% 0.23% 0.20%
Phillips 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pottawatomie 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pratt 0.55% 0.22% 0.12% 0.97% 0.56% 0.30% 0.87%
Rawlins 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Reno 0.11% 0.63% 0.21% 0.20% 0.15% 0.26% 0.23%
Republic 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rice 0.09% 0.07% 0.08% 0.19% 0.21% 0.10% 0.19%
Riley 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rooks 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rush 0.32% 0.27% 0.24% 0.11% 0.13% 0.06% 0.08%
Russell 0.00% 0.04% 0.00% 0.03% 0.01% 0.00% 0.00%
Saline 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Scott 0.00% 0.00% 0.02% 0.03% 0.06% 0.06% 0.11%
Sedgwick 0.13% 0.00% 0.00% 0.06% 0.01% 0.00% 0.00%
Seward 6.43% 5.23% 4.41% 3.97% 5.86% 5.97% 5.16%
Shawnee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Sheridan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Sherman 0.00% 0.00% 0.00% 0.00% 0.06% 0.05% 0.31%
Smith 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Stafford 0.28% 0.18% 0.15% 0.18% 0.22% 0.20% 0.17%
Stanton 3.81% 3.46% 4.35% 4.35% 2.59% 4.68% 3.82%
Stevens 24.09% 19.33% 18.40% 24.03% 24.95% 22.90% 14.65%
Sumner 0.00% 0.05% 0.24% 0.27% 0.04% 0.13% 0.21%
Thomas 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Trego 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wabaunsee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wallace 0.00% 0.00% 0.00% 0.00% 0.00% 0.03% 0.02%
Washington 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wichita 0.00% 0.00% 0.00% 0.00% 0.03% 0.02% 0.02%
Wilson 0.05% 0.02% 0.00% 0.03% 0.07% 0.12% 3.75%
Woodson 0.00% 0.00% 0.00% 0.00% 0.02% 0.01% 0.03%
Wyandotte 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
State Total 420,588,383 632,609,850 901,017,449 693,342,142 592,739,286 533,658,257 333,149,615
* The production from the Hugoton gas ?eld was not split among counties before 1953.
Source: Kansas Geological Survey
90
Table B12
Estimated Economic Impact of Upstream and Downstream Oil and Gas Industry
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars)
Job Count: Job Count: Payroll:* Receipts:
Estab. Estab. Estab. Estab. Estimated Estimated Estimated Estimated
with without with without Indirect Indirect Induced Induced
Upstream Sector Employees** Employees** Employees Employees Jobs Payroll Jobs Payroll
Oil and gas extraction 2,811 6,143 $194,767 $486,933 4,830 $235,377 7,278 $210,569
Drilling oil and gas wells 1,322 0 70,905 0 728 38,375 802 24,357
Support activities for oil
and gas operations 2,925 302 152,266 22,528 2,042 100,146 1,928 61,280
Oil and gas pipeline
construction 1,108 52 74,097 2,659 379 27,523 483 23,347
Pipeline transportation of
crude oil 173 0 18,261 0 202 10,168 175 6,317
Pipeline transportation of
natural gas 701 0 74,965 0 816 41,740 709 25,932
Geophysical surveying
and mapping 212 39 11,292 1,630 97 2,689 156 3,505
Downstream Sector
Natural gas distribution 1,807 0 144,191 0 833 40,718 1,515 41,248
Petroleum re?neries 1,519 0 139,400 0 5,774 452,803 10,544 425,299
Lique?ed petroleum gas,
bottled gas, dealers 521 52 21,012 7,599 36 2,019 36 1,717
Re?ned petroleum product
pipeline transportation 466 0 42,268 0 542 23,534 471 14,621
Naural-gas powered
electricity generation 272 0 27,439 0 83 6,461 250 13,676
Asphalt paving mixture and
block mfg. 200 16 10,989 604 142 7,815 647 17,775
Asphalt shingle and coating
materials mfg. 241 5 14,727 933 215 13,270 1,198 39,189
Petroleum lubricating oil and
grease mfg. 187 13 13,943 978 226 13,219 1,132 37,436
Nitrogenous fertilizer
manufacturing 183 0 14,783 0 309 22,033 234 9,883
Heating oil dealers 176 52 6,855 7,599 14 999 14 850
Petroleum merchant
wholesalers 1,587 34 105,773 6,286 611 29,104 913 31,297
Gasoline stations 11,123 125 230,669 23,224 1,736 68,116 2,320 71,649
General freight trucking 9,248 3,395 476,997 338,655 4,639 255,613 5,554 233,728
Specialized freight trucking 4,604 362 206,930 30,199 1,822 76,013 2,182 69,505
Rail transportation 403 0 49,789 0 277 16,985 345 14,807
Industrial gas mfg. 237 0 17,689 0 346 27,828 368 14,159
* Includes estimates of bene?ts.
** Note: Job counts have been adjusted when necessary to estimate only those counts supported by the oil and gas value chain.
Estab. = Establishments (places of business with a physical address).
Source: Census Bureau; Bureau of Labor Statistics; IMPLAN; Center for Applied Economics, KU School of Business
91
Table B13
Estimated Share of Select Tax Supported by the Oil and Gas Industry Value Chain
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars)
Share
of
Mort- Vehicle State-
O&G Unemp Personal Resi- Insur- gage Related Alcohol wide
Property + Motor Comp Income dential Sales ance Regis- Taxes/ and Avg.
Severance Fuels Tax Tax Property Tax Premiums tration Fees Tobacco Total Total
Oil and gas extraction 298,538 0 2,655 32,485 22,374 49,892 1,798 715 7,574 3,558 419,589 4.5%
Drilling oil and gas wells 0 0 566 3,621 3,139 5,827 251 100 1,031 419 14,953 0.2%
Support activities
for oil and gas operations 0 0 1,273 8,402 7,525 13,935 607 243 2,527 988 35,499 0.4%
Oil and gas
pipeline construction 0 0 364 3,660 2,132 5,156 172 68 718 367 12,638 0.1%
Pipeline transportation
of crude oil 0 0 97 1,018 553 1,462 46 19 194 104 3,494 0.0%
Pipeline transportation
of natural gas 0 0 387 4,211 2,168 6,064 183 76 784 421 14,294 0.2%
Geophysical Surveying
and Mapping 0 0 87 342 548 764 43 17 179 55 2,035 0.0%
Natural gas distribution 0 0 737 6,013 4,213 9,173 344 141 1,468 641 22,730.2 0.2%
Petroleum re?neries 0 0 3,092 34,272 17,818 48,326 1,474 598 6,283 3,372 115,234.7 1.2%
Lique?ed petroleum gas,
bottled gas, dealers 0 0 99 740 633 1,277 52 22 228 89 3,140.1 0.0%
Re?ned petroleum
product pipeline transportation 0 0 255 2,229 1,443 3,359 119 50 518 230 8,204.6 0.1%
Naural-gas powered
electricity generation 0 0 106 1,878 608 2,377 50 20 214 164 5,417.6 0.1%
Asphalt paving mixture
and block mfg. 0 0 148 995 955 1,716 81 33 360 114 4,402.8 0.0%
Asphalt shingle and
coating materials mfg. 0 0 280 2,041 1,580 3,237 134 57 584 221 8,133.0 0.1%
Petroleum lubricating oil
and grease mfg. 0 0 304 1,946 1,601 3,021 132 55 546 216 7,821.5 0.1%
Nitrogenous fertilizer
manufacturing 0 0 119 1,538 732 2,025 60 24 257 142 4,895.9 0.1%
Heating oil dealers 0 0 38 562 254 678 21 9 91 48 1,699.8 0.0%
Petroleum merchant
wholesalers 0 0 544 4,530 3,183 7,003 262 106 1,112 494 17,233.3 0.2%
Gasoline stations 0 447,605 2,612 5,640 15,208 15,700 1,259 516 5,405 1,078 495,024.1 5.3%
General freight trucking 0 0 3,400 48,292 23,217 73,735 1,895 769 8,069 5,143 164,519.0 1.8%
Specialized freight trucking 0 0 1,503 11,969 9,101 21,451 744 302 3,168 1,494 49,732.1 0.5%
Rail transportation 0 0 992 11,898 5,807 16,676 480 196 2,075 1,130 39,255.2 0.4%
Industrial gas mfg. 0 0 162 2,011 935 2,751 78 32 335 188 6,492.0 0.1%
Note: Estimates do not include corporate income taxes or business-level property taxes. These levies could be substantial but there is no
credible way to estimate them.
Source: Kansas Tax Facts (various years); Kansas Department of Revenue; Center for Applied Economics, KU School of Business
92
Share of O&G Share
Average O&G Property of Total
Property Taxes Paid Property
Taxes Paid Statewide Tax Paid
County (Millions) (Percent) (Percent)
Kansas $189.55 n.a. 5.7%
Allen 0.26 0.1 2.1
Anderson 0.16 0.1 1.6
Atchison 0.00 0.0 0.0
Barber 4.11 2.0 36.7
Barton 3.52 1.7 10.5
Bourbon 0.04 0.0 0.3
Brown 0.00 0.0 0.0
Butler 1.79 0.9 2.5
Chase 0.12 0.1 2.2
Chautauqua 0.42 0.2 10.0
Cherokee 0.00 0.0 0.0
Cheyenne 0.57 0.3 13.1
Clark 1.65 0.8 23.2
Clay 0.00 0.0 0.0
Cloud 0.00 0.0 0.0
Coffey 0.09 0.0 0.2
Comanche 2.77 1.5 49.8
Cowley 0.84 0.4 2.5
Crawford 0.02 0.0 0.1
Decatur 0.45 0.2 8.7
Dickinson 0.01 0.0 0.1
Doniphan 0.00 0.0 0.0
Douglas 0.03 0.0 0.0
Edwards 0.78 0.4 12.3
Elk 0.12 0.1 3.2
Ellis 4.93 2.4 14.6
Ellsworth 0.51 0.3 5.7
Finney 14.20 7.8 26.0
Ford 0.49 0.2 1.2
Franklin 0.08 0.0 0.3
Geary 0.01 0.0 0.0
Gove 0.90 0.4 16.6
Graham 2.69 1.2 37.3
Grant 19.33 10.8 65.6
Gray 0.22 0.1 2.5
Greeley 1.28 0.7 25.0
Greenwood 0.69 0.3 7.9
Hamilton 3.95 2.2 42.8
Harper 1.92 1.0 18.3
Harvey 0.29 0.1 1.0
Haskell 12.88 7.0 73.1
Hodgeman 0.92 0.4 16.6
Jackson 0.00 0.0 0.0
Jefferson 0.03 0.0 0.1
Jewell 0.00 0.0 0.0
Johnson 0.13 0.1 0.0
Kearny 16.86 9.5 75.2
Kingman 3.18 1.6 23.5
Kiowa 1.76 1.0 21.5
Labette 0.25 0.1 1.2
Lane 1.62 0.8 27.8
Leavenworth 0.10 0.0 0.2
Lincoln 0.00 0.0 0.0
Linn 0.05 0.0 0.3
Logan 0.61 0.3 11.0
Lyon 0.02 0.0 0.1
Marion 0.38 0.2 2.7
Marshall 0.00 0.0 0.0
McPherson 0.57 0.3 1.6
Meade 1.87 1.0 15.9
Share of O&G Share
Average O&G Property of Total
Property Taxes Paid Property
Taxes Paid Statewide Tax Paid
County (Millions) (Percent) (Percent)
Miami $0.13 0.1% 0.3%
Mitchell 0.00 0.0 0.0
Montgomery 1.16 0.5 2.5
Morris 0.15 0.1 2.1
Morton 10.59 5.9 65.8
Nemaha 0.11 0.1 1.1
Neosho 1.13 0.5 6.4
Ness 3.14 1.5 39.8
Norton 0.24 0.1 4.1
Osage 0.00 0.0 0.0
Osborne 0.19 0.1 3.5
Ottawa 0.00 0.0 0.0
Pawnee 0.50 0.3 5.4
Phillips 0.64 0.3 8.6
Pottawatomie 0.00 0.0 0.0
Pratt 1.40 0.7 7.1
Rawlins 0.39 0.2 8.5
Reno 1.54 0.8 2.1
Republic 0.00 0.0 0.0
Rice 1.36 0.7 9.1
Riley 0.01 0.0 0.0
Rooks 3.43 1.6 34.4
Rush 0.54 0.3 9.5
Russell 3.28 1.6 24.9
Saline 0.08 0.0 0.1
Scott 0.97 0.4 9.2
Sedgwick 0.24 0.1 0.1
Seward 10.85 5.8 34.0
Shawnee 0.00 0.0 0.0
Sheridan 0.44 0.2 9.1
Sherman 0.08 0.0 1.0
Smith 0.00 0.0 0.0
Stafford 2.26 1.1 22.3
Stanton 7.87 4.4 70.1
Stevens 21.74 12.1 78.1
Sumner 1.17 0.6 4.3
Thomas 0.35 0.2 3.0
Trego 1.15 0.5 18.1
Wabaunsee 0.08 0.0 1.0
Wallace 0.39 0.2 11.1
Washington 0.00 0.0 0.0
Wichita 0.12 0.1 2.3
Wilson 1.03 0.4 9.9
Woodson 0.36 0.2 8.4
Wyandotte 0.00 0.0 0.0
Table B14
Property Taxes Paid by Oil and Gas Properties
(Average Infation-Adjusted Dollars and Shares, 1998-2010)
Source: Kansas Department of Revenue; Center for Applied Economics, KU School of Business
93
Directory of Exhibits, Charts and Maps
A 3-D Seismic-Generated Image Underneath the Gulf of Mexico ...........................................................2
Number of Kansas Wells Drilled, by Type, 1889-2011 ...........................................................................4
Kansas Cost Per Well Drilled, by Type (2010$) ......................................................................................5
Average Well Depths by County, in Feet .................................................................................................6
Estimated Average Well Cost per Foot,
Select Years .........................................................................................................................................6
Price of Kansas Oil & Natural Gas (2010$) ...........................................................................................7
Example Oil Well: Production Curve and Oil Prices (2010$) .................................................................8
Example Oil Well: Revenues and Operating Costs (2010$) ....................................................................8
Example Gas Well: Production Curve and Gas Prices (2010$) ................................................................9
Example Gas Well: Revenues and Operating Costs (2010$) ...................................................................9
Total Number of Oil, Gas, and Dry Wells Drilled by State, 2005-2009 ................................................10
Total Oil and Gas Production by State, 2005-2009 ..............................................................................11
A Comparison of Prices for Select Crude Oils (2010$) .........................................................................12
Average December 2011 Posted Prices per Barrel for Diferent Crude Oils ...........................................13
Select Operating Information for Kansas-Based Oil Refneries ..............................................................13
99% Confdence Intervals for Oil Price Forecasts .................................................................................14
World Oil Production and Consumption .............................................................................................15
Oil Consumption-Production Gap and Oil Price (2010$) ....................................................................15
Trends in World Oil Production and Consumption ..............................................................................16
Kansas Wellhead Oil Price (2010$) and Non-Gas Wells Drilled One Year Later ...................................18
Examples of Contango and Backwardation in the Futures Market for West Texas
Intermediate Crude Oil ....................................................................................................................20
Relationship among Futures Curves, Crude Stocks, and WTI Spot Prices ............................................21
Relative Volatility of Select Regional Crude Oil Stock Levels ................................................................22
Comparison of Refnery Distillation Yields and Other Characteristics ..................................................25
Prices for Kansas Crude and Natural Gas (per Barrel, 2010$) ...............................................................27
U.S. Monthly Natural Gas Consumption and Production ....................................................................28
Trend in U.S. Natural Gas Consumption and Production ....................................................................29
Annual Production of Oil and Gas in Kansas, 1890-2011 ....................................................................31
Percentage of Kansas Wells Drilled by Type, 1910-2011 .......................................................................32
Tertiary Oil Recovery ...........................................................................................................................33
Key Elements of Modern Drilling Technology ......................................................................................34
A Sketch of the Upstream Oil & Gas Industry......................................................................................36
U.S. and Kansas Count of Active Drilling Rigs .....................................................................................37
Drill Casing and Cementing .................................................................................................................38
Approximate Area of Interest Related to the Mississippian Lime Formation and Count of
Horizontal Well Permits vs. Wells Drilled (2010 through July 2012) in the Top-6 Counties ............42
Quarterly Upstream Job Count in Select “Boom” Counties ..................................................................43
Upstream Jobs as a Share of Total Jobs (implied by Chart 1) .................................................................44
Quarterly Change of Upstream and Total Jobs (along with Upstream Job Share) in
Williams County, North Dakota .....................................................................................................44
Horizontal Wells Completed in Oklahoma Mississippian Lime Counties .............................................45
Local versus State Government Shares of Oil and Gas Related Taxes and Royalties, Select States .........48
Growth of Kansas Income Resulting from Select Scenarios Related to the Mississippian Lime Play .....50
94
Economic Impact Metrics Resulting from Select Scenarios Related to the Mississippian
Lime Play (Dollars in Millions) ........................................................................................................51
Coalbed Methane Activity in Eastern Kansas,
Wells Drilled (Share of Cumulative Production) ..............................................................................53
Kansas Coalbed Methane Wells Drilled and Kansas Natural Gas Price, 1981-2011 ..............................54
Kansas Coalbed Methane Production, 1995-2011 ................................................................................54
State-by-State Cumulative Coalbed Methane Production, 2005-2010, Billions of Cubic Feet ..............56
Major Migrations of Oil Men ...............................................................................................................57
Kansas Oil and Gas Production as a Share of U.S. Production .............................................................59
Select Events in Early Kansas Oil & Gas History ..................................................................................60
Top-15 States, as Ranked by Upstream Industry Average Share of State Gross Domestic
Product, 1965-2010 .........................................................................................................................61
Annual Market Value of Kansas Oil and Natural Gas (2010$) ..............................................................61
Growth Trends of Oil and Gas Prices and Components of GDP ..........................................................62
County-by-County Share of Jobs in the Upstream Sector .....................................................................63
Kansas Close-Up County-by-County Share of Jobs in the Upstream Sector ..........................................64
County-by-County Value of Oil Production (and Rank) in 2011, $Millions ........................................65
County-by-County Value of Gas Production (and Rank) in 2011, $Millions .......................................65
A Representation of the Oil and Gas Value Chain for the State of Kansas
(Average Annual Economic Contribution from 1998 to 2010; Millions of 2010 Dollars) ................66
Kansas Refneries and Pipelines .............................................................................................................67
Avg. Annual Direct Jobs, Upstream & Downstream, 1998-2010 .........................................................68
Avg. Annual Direct Payroll, Upstream & Downstream, 1998-2010 .....................................................68
Avg. Annual Direct Jobs by Business Establishment Job Count, Upstream &
Downstream, 1998-2010 ................................................................................................................69
Avg. Annual Indirect and Induced Jobs by Sector, Upstream & Downstream, 1998-2010 ...................69
Avg. Annual State and Local Taxes by Type Supported by the Upstream & Downstream
Sectors, 1998-2010, Millions 2010$ ...............................................................................................70
Production Profle of a Representative Horizontal Well
Related to the Mississippian Lime Play ............................................................................................73
Estimated Potential Well Count by County, Select Scenarios ................................................................74
Texas Counties that Help Defne the Geography of the Barnett Shale .................................................74
County-by-County Well Count, Average Well Depth, and Maximum Well Depth ...............................75
Total Wells Drilled by State (2005-2009) .............................................................................................76
Total Footage Drilled by State (2005-2009) ..........................................................................................77
Average Cost per Foot Drilled; Average Cost per Well Drilled; and Total
Cost of Drilling (2005-2009) ...........................................................................................................78
Distribution of Drilling and Production Activity among Select “Major” Oil Companies and
Independent Companies ..................................................................................................................79
State-by-State Oil Production ...............................................................................................................80
State-by-State Natural Gas Marketed Production ..................................................................................81
County-by-County Oil Production (Barrels) ........................................................................................82
County-by-County Share of Oil Production (State Totals in Barrels) ....................................................84
County-by-County Gas Production (1,000 Cubic Feet) .......................................................................86
County-by-County Share of Natural Gas Production (State Totals in 1,000 Cubic Feet) ......................88
Estimated Economic Impact of Upstream and Downstream Oil and Gas Industry
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars).............90
95
Estimated Share of Select Tax Supported by the Oil and Gas Industry Value Chain
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars).............91
Property Taxes Paid by Oil and Gas Properties
(Average Infation-Adjusted Dollars and Shares, 1998-2010) ............................................................92
Center for Applied Economics
University of Kansas School of Business
Summerfeld Hall, 1300 Sunnyside Avenue
Lawrence, KS 66045-7585
www.cae.business.ku.edu
(785) 864-5134
doc_377925718.pdf
The renaissance in United States oil and gas production reaffirms the timeless tribute Mr. Tait made to the nation's petroleum entrepreneurs almost 70 years ago. The tools have changed a lot but the pioneer spirit has not. Boundless entrepreneurial energy and an increasingly sophisticated, high-tech string of tools has created a genuine opportunity for the United States to become a net energy exporter instead of a net energy importer.
T H E C E N T E R F O R
APPLIED ECONOMICS
Technical Report 12-1116
November 2012
SCHOOL OF
BUSINESS
The University of Kansas
Supporting Regional Economic Development through Analysis and Education
THE KANSAS OIL AND GAS INDUSTRY:
AN ENDURING MODEL
OF HIGH-TECH ENTREPRENEURSHIP
Arthur P. Hall
Executive Director
Center for Applied Economics
University of Kansas
School of Business
About The Center for Applied Economics
The KU School of Business established the Center for Applied Economics in February of 2004. The mission of
the Center for Applied Economics is to help advance the economic development of the state and region by offering
economic analysis and economic education relevant for policy makers, community leaders, and other interested citi-
zens. The stakeholders in the Center want to increase the amount of credible economic analysis available to decision
makers in both the state and region. When policy makers, community leaders, and citizens discuss issues that may
have an impact on the economic development potential of the state or region, they can beneft from a wide array of
perspectives. The Center focuses on the contributions that markets and economic institutions can make to economic
development. Because credibility is, in part, a function of economic literacy, the Center also promotes economics
education.
About the Author
Arthur P. Hall is the founding Executive Director of the Center for Applied Economics at the University of Kansas
School of Business. Before joining the KU School of Business, Hall was Chief Economist in the Public Affairs group
of Wichita, KS-based Koch Industries, Inc. In that capacity, he worked with business leaders to defne how public
policy initiatives would infuence the structure of the markets in which the company participates. Koch sponsored
Hall’s directorship of Kansas Governor Sebelius’ Budget Effciency Savings Teams from April 2003 until his depar-
ture from the frm in February 2004.
Before joining Koch Industries in May 1997, Hall was Senior Economist at the Washington, D.C.-based Tax Founda-
tion, where he produced quantitative and qualitative research pertaining to the economics of taxation and acted as
an economic advisor to The National Commission on Economic Growth and Tax Reform. Before that, he worked
as a fnancial economist at the U.S. General Accounting Offce. Hall has taught university-level economics at both
the undergraduate and MBA level. He received his doctorate in economics from the University of Georgia and his
bachelor of arts in economics from Emory University.
The opinions expressed are those of the author; they should in no way be interpreted as the viewpoints of the
University of Kansas (or any subunits thereof) or the Kansas Board of Regents.
The Center for Applied Economics gratefully acknowledges fnancial support from the Kansas Oil and Gas Resource
Fund.
i
Table of Contents
The Kansas Oil and Gas Industry: An Enduring Model of High-Tech Entrepreneurship ..........1
Visualizing the Model of High-Tech Entrepreneurship ...............................................................4
Understanding Global Price-Setting Mechanisms in the Context of
Integrated Global Markets ...............................................................................................................12
Trends in the Global Consumption and Production of Oil ............................................14
Details Related to Oil Supply ................................................................................................17
Physical Markets and Paper Markets: Prelude to Discussion of Oil Demand ..............19
Details Related to Oil Demand ............................................................................................23
Environmental Regulations: An Explanation of the Price Spike of 2006-2008 .........24
The Co-Movement of Oil and Natural Gas Prices ...........................................................27
Entrepreneurial Cost Control through the Business of Science and Engineering .................30
The Technology of the Upstream Sector ...........................................................................31
The Business of the Upstream Sector .................................................................................35
Site Preparation, Well Drilling, and Well Completion .......................................................37
Health, Safety, and Environmental Oversight ....................................................................39
Assessing the Future: How “Unconventional” Oil and Gas Plays May
Contribute to the Kansas Economy ..............................................................................................41
The Mississippian Lime Play .................................................................................................41
The Potential for Infrastructure Strains in Kansas............................................................46
Estimating Potential Economic Impacts in Kansas ..........................................................49
Coalbed Methane in Eastern Kansas ...................................................................................53
Assessing History: How the Oil and Gas Industry Has Contributed to the
Kansas Economy ..............................................................................................................................56
A Brief Economic History of Oil and Gas in Kansas .....................................................57
The Upstream Sector and Kansas Gross Domestic Product ..........................................62
The Overall Oil and Gas Value Chain in Kansas ..............................................................66
A Primer on the Kansas Severance Tax (K.S.A 79-4217) ................................................71
A Primer on Kansas Ad Valorem Taxation of Oil and Gas Property ...........................72
Appendix A: ..............................................................................................................................................73
Technical Details of Mississippian Lime Simulation Model and Economic
Impact Estimates ..............................................................................................................................73
Appendix B ...............................................................................................................................................75
Supplementary Data Tables .............................................................................................................75
Directory of Exhibits, Charts and Maps ..............................................................................................93
ii
1
The Kansas Oil and Gas Industry: An Enduring
Model of High-Tech Entrepreneurship
The oil game is one pioneering activity that has never had a frontier,
and until the last porous stratum of rock is explored it never can have
one. There would be mirth-provoking irony in a map of the United States
showing the boundaries, lateral and horizontal, beyond which dogmatists
have at one time or another said oil could not be found—which mental
barbed-wire fences have snapped under the irrepressible urge of the . . .
wildcatter’s boundless energy, curiosity, ambition, and skill with a string
of tools.
— Samuel W. Tait, Jr.
1
The renaissance in United States oil and gas produc-
tion reaffirms the timeless tribute Mr. Tait made to
the nation’s petroleum entrepreneurs almost 70 years
ago. The tools have changed—a lot—but the pioneer
spirit has not. Boundless entrepreneurial energy and an
increasingly sophisticated, high-tech string of tools has
created a genuine opportunity for the United States to
become a net energy exporter instead of a net energy
importer. Kansas helped deliver the original birth of
the U.S. oil and gas industry and now the state may help
deliver the industry’s rebirth.
Early in Kansas history, after the frst oil and gas booms,
people fretted about depleting the state’s oil and gas
reserves.
2
Similar fretting has taken place globally; the
notion of “peak oil” has attracted widespread attention
since at least the 1950s. These ideas can seem intuitive.
The earth is fnite.
Yet, such mindsets inevitably underestimate the power
of economics and the relentless drive of entrepreneurs.
Geologist Walter Youngquist captured a more apt per-
spective in a communication to Dan Merriam, Senior
Scientist Emeritus at the Kansas Geological Society:
“Kansas experience shows that aging oil regions can
still be given a drink from the Fountain of Youth if
the imagination and ingenuity of the human mind is
diligently and persistently applied.”
3
The independent oil and gas producers of Kansas have
demonstrated clear diligence and persistence. They have
drilled an average of 2,750 wells per year over the past
20 years, implying an average investment in the Kansas
economy of at least $700 million annually (in 2010
dollars). A group of entrepreneurial companies in the
Mid-Continent have poured decades of imagination and
ingenuity into the quest for developing unconventional
oil and gas supplies—the shale-related oil and gas sup-
plies that have recently captured the public’s attention.
High-tech entrepreneurship and economics help frame
the core defnitional element of “proved” oil and gas
reserves, underscoring Dr. Youngquist’s suggestion
that oil and gas supplies are a moving target, a result of
entrepreneurial initiative. The U.S. Energy Informa-
tion Administration defnes “proved reserves” as “the
estimated quantities which analysis of geological and
engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs
under existing economic and operating conditions.”
Since 1990, the U.S. has increased its proved reserves
of natural gas by 60 percent, back up to levels recorded
1 Samuel W. Tait, Jr., The Wildcatters: An Informal History of Oil-Hunting in America (Princeton: Princeton University Press, 1946),
p. xiii.
2 Phyllis Jacobs Griekspoor, “The First 150 Years: From the Efforts of the Early Kansas Explorers to the Modern Petroleum Indus-
try,” The Wichita Eagle Beacon Publishing Company, August 2010.
3 Daniel F. Merriam, “Advances in the Science and Technology of Finding and Producing Oil in Kansas: A Critique,” Oil-Industry
History, Vol. 7, No. 1, 2006, p. 44.
2
in the early 1970s. Proved reserves of crude oil have
also begun to increase. The changes have resulted
from entrepreneurs going after supplies that geologists
have long suspected to exist but could not be reached
in accord with the prevailing technology and econom-
ics—until now.
Like many dramatic changes in industry, what seems
sudden and new actually took decades to develop. The
word “fracking” has entered the public’s lexicon. But
the popular use of the term actually embodies three dif-
ferent, mutually-reinforcing (and increasingly integrated)
technologies:
1. Hydraulic fracturing. The term “fracking” refers
to a process of fracturing underground rock and
sediment layers to help trapped oil and gas fow
more freely. The idea dates back to the pre-1900
days of drilling in Kansas—only in those days a
few Wild-West-type gentlemen practiced the entre-
preneurial art of “shooting” a well with a nitroglyc-
erin-fueled “torpedo.” Kansas entrepreneurs used
this technique on the frst commercial oil well in
Kansas—the so-called Norman #1 well located in
Neodesha (drilled in 1892 and shot in 1893).
4
The
frst hydraulic fracturing experiment was conducted
in 1947 at the Hugoton gas feld in Grant County,
Kansas.
5
The process involves pumping a mixture
of fuid and sand into the well. The hydraulic pres-
sure fractures the rock and sediments. The sand
keeps the fractures open and porous.
Exhibit 1
A 3-D Seismic-Generated Image Underneath the Gulf of Mexico
A complete 3D picture of the subsurface near two producing oil ?elds in the Gulf of Mexico not only shows the sea bed at some 1,000m
water depth, but features such as salt structures in green and a salt diapir that penetrates the sea bed (white). Thin lines show the paths
of wells drilled to over 2000m below the sea bed to develop the ?elds, fanning out to penetrate various reservoirs. Shallow bodies in front
of the well paths on the left hand side may provide hazards to drilling. Oil ?eld reservoirs can be seen in color (yellows and reds) at deeper
levels. Most features are extracted from the actual data, though parts of two seismic pro?les are shown in black and white near the base of
the display.
Source: http://www.geolsoc.org.uk/gsl/geoscientist/features/page2722.html
4 Craig Miner, Discovery!: Cycles of Change in the Kansas Oil and gas Industry, 1860-1987 (Wichita, Kansas: KIOGA, 1987), p.
41.
5 http://en.wikipedia.org/wiki/Hydraulic_fracturing
3
2. Horizontal drilling. A patent for the forerun-
ner of horizontal drilling tools was issued in 1891.
The frst true horizontal well was drilled in 1929 in
Texas.
6
Techniques associated with horizontal drill-
ing gradually improved following World War II, but
the economics remained unfavorable until the late
1980s. Horizontal wells cost signifcantly more to
drill than traditional vertical wells. By about 1990,
horizontal wells comprised an estimated 10 percent
of all U.S. wells drilled. The improving technology
and economics (which often also implies a reduced
environmental footprint), motivated further expan-
sion of horizontal drilling, much of it in association
with the Austin chalk geologic formation in Texas
and the Bakken shale formation underneath Mon-
tana and North Dakota.
7
3. 3-D seismic imaging. Seismic imaging for pur-
pose of oil and gas exploration dates back to the
mid-1920s. The technology, in one way or another,
blasts sound waves into the earth and records the
echoes that return. Different substances produce
different echoes, creating identifable patterns. Early
techniques created 2-D images or cross sections of
the subsurface. 3-D techniques, signifcantly aided
by the advent of digital computer technology in the
1980s, allow for the creation of a three-dimensional
picture of the targeted subsurface. These 3-D pic-
tures can reveal much more detailed patterns and,
therefore, allow for much better precision in the
exploration and drilling processes. (Independent
producers in Kansas have put—continually-improv-
ing—3-D seismic imaging technology to work since
about 1990.
8
In many cases, it has brought new life
to old producing properties.) 3-D seismic imag-
ing projects cost about $40,000 per square mile in
Kansas. Exhibit 1 vividly demonstrates the types
of images that experts can create from raw 3-D
seismic data.
A complete list of causes contributing to the U.S. oil
and gas rebirth should also add: (1) well-defned private
property rights and (2) well-functioning futures markets.
As a Wall Street Journal editorial argued: “‘Whoever owns
the soil, it’s theirs up to Heaven and down to Hell.’ So
goes the ancient common-law principle. Today, however,
almost no major country recognizes full subsurface
private property rights, except for the United States.
. . . What has given the U.S. its edge is that the early
development risks were largely borne by small-time
entrepreneurs, drilling a lot of dry holes on private
land. These ‘wildcat’ developers were gradually able
to buy up oil, gas and mineral leases from private own-
ers while gathering enough geological data to bring in
commercial producers.”
9
Veteran petroleum economist
Philip Verleger has argued that: “Financial engineering
underpinned the renewal of U.S. oil and gas produc-
tion. While most writers and analysts credit petroleum,
chemical, and computer engineers for developing tech-
nologies that led to the rebirth of American oil and gas
output, the initial catalyst was the developers of futures
markets. The fnancial engineers who brought the risk
management techniques devised originally for agriculture
to energy provided a system that allowed smaller frms
to operate successfully despite very large swings in oil
and gas prices.”
10
Kansas producers have effectively employed all of these
innovations. Looking at Kansas opportunities prospec-
tively, horizontal-drilling technologies have made it pos-
sible to freshly explore the potential of rock formations
that have yielded oil and gas for years, as detailed below
in the Mississippian Lime discussion. Many of these
innovations may also help advance gas extraction from
the coalbeds of eastern Kansas, an enormous resource
that has received the attention of Kansas producers for
only a few decades.
6 Bill D. Berger and Kenneth E. Anderson, Modern Petroleum: A Basic Primer of the Industry, 3rd Edition (Tulsa: PennWell
Publishing Company, 1992), p. 127
7 American Petroleum Institute, et al., “Joint Association Survey on Drilling Costs, 1995”, p. 3.
8 Susan Nissen, et al. “3-D Seismic Applications by Independent Operators in Kansas,” Petroleum Technology Transfer
Council, January 2003. http://www.nmcpttc.org/Case_Studies/PTTCseismic_case/3d-seismic_appl.html
9 Editorial Board, Wall Street Journal, “The Shale Gas Secret,” July 13, 2012.
http://online.wsj.com/article/SB10001424052702303919504577520421300962752.html
10 Philip K. Verleger, Jr., “The Amazing Tale of U.S. Energy Independence,” The International Economy, Spring 2012, p. 54.
4
Visualizing the Model of
High-Tech Entrepreneurship
The laws of economics work in a vivid fashion in the
oil and gas industry. First, oil and gas have commodity-
like properties. Hydrocarbons extracted from different
geologies are not identical, but experts can measure and
economically value their differences. Second, the entire
oil and gas value chain—from hydrocarbons in the
ground to the consumption of end-use fuels—operates
within a constrained, chemistry-based, highly engineered,
and highly capital-intensive delivery system. These two
general industry attributes explain why the markets for
oil and gas—but most especially oil—operate as highly
integrated world markets—markets that react swiftly,
and often dramatically, to seemingly small disturbances.
Kansas producers, and their colleagues around the
world, succeed in these volatile world markets by being
more entrepreneurially deft than their competitors. The
essence of the high-tech entrepreneurship embodied in
the oil and gas industry can be captured by three sets of
metrics: the odds of drilling a producing well, the cost of
drilling a well, and the price of oil or gas. Chart 1, Chart
2, and Chart 3 capture these metrics. The upstream oil
and gas businesses face enormous discovery, production,
and price risks coupled with high-cost, capital-intensive
processes. The development of increasingly sophis-
ticated tools for management of the risks defnes the
high-tech nature of the oil and gas business. The will-
ingness to embrace and prudently manage the full array
and complexity of the risks defnes the entrepreneurship
necessary to succeed in the oil and gas business.
Chart 1 illustrates the recorded history of drilling in
Kansas. It counts four types of wells: wells that produce
oil; wells that produce natural gas (including coalbed
methane); wells used to service producing wells (perhaps
for the disposal of water or executing enhanced recovery
procedures); and wells that produce nothing—dry holes.
(Many wells, of course, produce both oil and natural gas.)
Over the entire history of Kansas oil and gas well drill-
ing, excluding service wells, 40 percent of the wells
drilled have been dry holes—expensive risks taken for
no economic gain. Notice on Chart 1, however, the
0
2,000
4,000
6,000
8,000
10,000
12,000
1
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8
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0
2
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0
5
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1
0
Oil Gas (including CBM) Service Dry Hole
Chart 1
Number of Kansas Wells Drilled, by Type, 1889-2011
Source: Kansas Geological Survey
5
steady decline in the percentage of dry holes over the
past three decades. During the 1970s, drilling in Kan-
sas resulted in dry holes 48 percent of the time; during
the 1980s, 42 percent of the time; during the 1990s, 31
percent of the time; and during the 2000s, dry holes
resulted 21 percent of the time. This improved success
rate tracks national trends and has primarily resulted
from superior—but more costly—technologies related
to oil and gas discovery. As mentioned above, Kansas
producers began using 3-D seismic imaging technology
about 1990, which helps explain the impressive gains in
cost-control related to drilling investments.
Chart 2 provides estimates on the average drilling costs
incurred in Kansas. Readily available cost of drilling data
begins in 1990. Based on the data in Chart 1 and Chart
2, Kansas oil and gas producers lost an average of about
$110 million per year on drilling dry holes.
The escalating costs beginning in 2004 have two general
explanations. First, as discussed below, escalating oil
and gas prices created a surge in demand for drilling
resources, thereby bidding up the cost. National data
show a similar escalation in per-well costs during the late
1970s and early 1980s, the years corresponding to the
Kansas drilling surge shown in Chart 1. Second, accord-
ing to Kansas Geological Survey records, the average
depth of Kansas wells increased in a stepwise fashion
from 2,565 feet in 2006 to 2,932 in 2009. (Nationwide,
the increase in horizontal drilling techniques have driven
up the average cost per well. Horizontal wells can more
than double the cost per foot to drill compared to tra-
ditional vertical wells.
11
However, horizontal wells in
Kansas represent less than one percent of wells drilled.)
Map 1 shows why the average drilling cost estimates
reported in Chart 2 require a broader perspective. Aver-
age well depths vary signifcantly from one part of the
Kansas to the next. Table 1 provides estimates of the
average per-foot costs implied by the per-well costs
reported in Chart 2. (Table B1 in Appendix B reports
by county the number of wells drilled in each county
and the depth of the deepest well drilled in each county.)
11 http://www.horizontaldrilling.org/
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
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$900,000
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Oil Gas Dry
Chart 2
Kansas Cost Per Well Drilled, by Type (2010$)
Source: Kansas Geological Survey
6
Table 1
Estimated Average Well Cost per Foot,
Select Years
2006 2007 2008 2009
Oil $100 $131 $168 $179
Gas 140 176 216 361
Dry 66 72 82 132
Successful discovery of oil or gas and the development
of a producing well do not guarantee business success.
The business must sell the production volumes at prices
suffcient to cover the development and production
costs—and the business owners’ opportunity costs
of investment capital. World markets set oil and gas
prices; Kansas producers must accept these prices if
they choose to sell.
Chart 3 shows infation-adjusted monthly prices for
Kansas oil and natural gas from 1978 through 2011.
Statistical tests confrm what the eye can see: the prices
of oil and gas have become more volatile in the past
decade than they were in the previous two decades.
Notice that the prices of oil and natural gas tend to move
together (although natural gas prices tend to have greater
volatility than oil prices). Before the clear deviation in
the two price series beginning in January 2010, the two
Kansas price series had a statistical correlation coeffcient
of 0.56, where a coeffcient of 1.0 indicates perfect
co-movement. (Nationally, the correlation coeffcient
was 0.75.) From January 2010 to December 2011, the
coeffcient became -0.55, indicating a stark divergence
of price trends rather than the traditional co-movement.
The volatility of prices underscores a key entrepreneurial
risk faced by Kansas oil and gas producers.
Historically, natural gas prices have adjusted (imper-
fectly) to the movement in oil prices, because natural
gas and refned petroleum products have competed as
the fuel of choice for a variety of industrial uses. No
doubt this price-linkage will eventually restore itself as
producers adjust to the natural gas price decline related
to the recent, technology-induced surge in production.
(A more detailed discussion of oil and gas price-setting
mechanisms follows.)
Key: Avg. Well Depth
Less than 1,000
1,000 to 3,000
3,000 to 5,000
More than 5,000
846
Allen
816
Anderson
1,984
Atchison
4,659
Barber
3,414
Barton
626
Bourbon
3,087
Brown
2,351
Butler
1,516
Chase
1,410
Chautauqua
536
Cherokee
2,552
Cheyenne
5,515
Clark
2,189
Clay
3,165
Cloud
1,347
Coffey
5,430
Comanche
2,916
Cowley
357
Crawford
3,770
Decatur
2,540
Dickinson
1,968
Doniphan
857
Douglas
4,494
Edwards
1,593
Elk
3,600
Ellis
3,228
Ellsworth
3,909
Finney
5,013
Ford
732
Franklin
2,283
Geary
4,368
Gove
3,868
Graham
3,384
Grant
5,036
Gray
4,017
Greeley
2,024
Greenwood
3,030
Hamilton
4,557
Harper
3,265
Harvey
4,505
Haskell
4,512
Hodgeman
3,078
Jackson
1,622
Jefferson
3,818
Jewell
847
Johnson
3,269
Kearny
4,172
Kingman
4,829
Kiowa
721
Labette
4,558
Lane
1,357
Leavenworth
3,230
Lincoln
547
Linn
4,655
Logan
2,331
Lyon
2,577
Marion
1,865
Marshall
3,130
Mcpherson
5,720
Meade
545
Miami
3,860
Mitchell
950
Montgomery
2,110
Morris
4,240
Morton
3,322
Nemaha
767
Neosho
4,397
Ness
3,675
Norton
1,880
Osage
3,520
Osborne
3,442
Ottawa
4,019
Pawnee
3,485
Phillips
2,437
Pottawatomie
4,329
Pratt
4,359
Rawlins
3,671
Reno
3,186
Republic
3,320
Rice
1,861
Riley
3,539
Rooks
3,780
Rush
3,164
Russell
3,055
Saline
4,449
Scott
3,273
Sedgwick
5,268
Seward
2,329
Shawnee
4,044
Sheridan
2,530
Sherman
3,622
Smith
3,845
Stafford
4,119
Stanton
4,232
Stevens
3,567
Sumner
4,618
Thomas
4,021
Trego
2,888
Wabaunsee
4,794
Wallace
3,270
Washington
4,672
Wichita
1,036
Wilson
1,225
Woodson
588
Wyandotte
Map 1
Average Well Depths by County, in Feet
Source: Kansas Geological Survey
7
The maturity of the Kansas oil and gas industry intensi-
fes rather than ameliorates the entrepreneurial challenge
faced by Kansas producers. Pending further discoveries,
Kansas producers have already found the large oil and
gas pools. So-called marginal wells (or stripper wells)
account for a large percentage of Kansas oil and gas
production. Defnitions can vary, but the industry typi-
cally defnes a marginal oil well as one that produces 10
barrels of oil per day or less over a 12 month period and
defnes a marginal gas well as one that produces 60,000
cubic feet per day or less. Using these defnitions, from
2005 through 2009, marginal oil wells accounted for
61.4 percent of Kansas production and marginal gas
wells accounted for 30.0 percent of Kansas produc-
tion. Expanding the defnition to 15 barrels per day
for oil wells and 80,000 cubic feet per day for gas wells,
the averages, respectively become 68.5 percent and 66.6
percent.
12
For Kansas producers, the predominance of stripper
wells adds to entrepreneurial risk for two reasons. First,
Kansas businesses specializing in production must have
an active drilling program to keep a full portfolio of pro-
ducing wells—wells that they expect will have relatively
low reserves or relatively low production rates. This
facet of the industry, in part, helps explain why Kansas
ranks ffth among the states in the total number of wells
drilled, as reported in Chart 8, but ranks ninth in total
production, as illustrated in Chart 9. (See Table B2,
B3, and B4 in Appendix B for more detailed state-by-
state drilling data.) Second, the relatively low revenue
generation created per stripper wells makes drilling and
operating costs per well a more substantial part of the
proft-or-loss equation.
To provide insight into the mechanics and economics
of stripper wells, Chart 4 and Chart 5 provide a portrait
of one such oil well and Chart 6 and Chart 7 provide a
portrait of one such gas well. On average, the oil well
has produced 11.3 barrels per day and the gas well has
produced 51,407 cubic feet per day. Notice several
important features of these portraits:
12 U.S. Energy Information Administration: http://www.eia.gov/pub/oil_gas/petrosystem/ks_table.html
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Chart 3
Price of Kansas Oil & Natural Gas (2010$)
Source: U.S. Energy Information Administration; Independent Oil & Gas Services (Red Top News)
8
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Revenue Total Operatng Costs Tax Component of Operatng Costs
Start-Up Costs (Drilling and Equipment, 2010$): $211,489
Internal Rate of Return on Investment: 3.12%
Chart 5
Example Oil Well: Revenues and Operating Costs (2010$)
Source: KIOGA member company.
$-
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Oil Producton Oil Price (2010$)
Chart 4
Example Oil Well: Production Curve and Oil Prices (2010$)
9
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
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Revenue Total Operatng Costs Tax Component of Operatng Costs
Start-Up Costs (Drilling and Equipment, 2010$): $191,320
Internal Rate of Return on Investment: 1.76%
Chart 7
Example Gas Well: Revenues and Operating Costs (2010$)
Source: KIOGA member company.
$-
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Chart 6
Example Gas Well: Production Curve and Gas Prices (2010$)
10
• Oil and gas wells have limited reserves. The
industry often describes the characteristics of a
given well by its “decline curve.” Each well faces
different decline characteristics, depending on
the associated geology producing the oil or gas.
Chart 4 and Chart 6 both show decline curves,
although the decline element is more pro-
nounced for the gas well. These decline curves
factor into the effort by production companies
to maintain their portfolio of producing wells
through an on-going drilling program.
• Chart 4 and Chart 6 include the price of oil and
gas received by the producer. As mentioned
above and discussed in detail below, Kansas
producers must accept market prices as a risk
factor beyond their control. With regard to the
time period covered by the charts, oil prices have
shown a favorable trend and gas prices have
shown an unfavorable trend, primarily because
of the price collapse in 2008 that took the price
back to 2002 levels.
• The production volatility and price volatility
combine to generate the revenue volatility
illustrated in Chart 5 and Chart 7. The overall
pattern of revenue volatility (when combined
with the pattern of costs) plays a signifcant role
in determining the producer’s and investors’ rate
of return on the well. The oil well has gener-
ated an infation-adjusted rate of return of 3.12
percent; the gas well 1.76 percent.
• Drilling costs (and the other costs associated
with bringing a well on-line) happen up-front,
of course. Note on Chart 5 and Chart 7 that the
drilling costs for the example oil and gas well at
$211,489 and $191,320, respectively, are roughly
consistent with the statewide averages illustrated
in Chart 2. These costs have a signifcant impact
on a well’s investment rate of return.
• The on-going operating costs of a well may
be less obvious to people unfamiliar with the
oil and gas business. These costs—and the
time pattern in which they materialize—act as
0
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20,000
30,000
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Oil Natural Gas Dry Hole
Kansas Rank in Oil Wells Drilled: 3rd
Kansas Rank in Gas Wells Drilled: 7th
Kansas Rank in Dry Wells Drilled: 2nd
Chart 8
Total Number of Oil, Gas, and Dry Wells Drilled by State, 2005-2009
Source: IHS Energy; Independent Petroleum Association of America
11
a substantial risk factor in the economics of a
well. Chart 5 and Chart 7 illustrate total operat-
ing costs and the tax-related subcomponent of
operating costs. For the oil well, the primary
non-tax operating costs involve well repairs,
electricity consumption, and salt water disposal.
For the gas well, the primary non-tax operating
costs involve labor for pumpers, who measure
and maintain the well, and overhead expenses
associated with the business management of
the well. The large spikes in the tax-related
operating costs come from the (primarily local
government) property tax. As explained toward
the end of the report, Kansas law levies prop-
erty tax on oil and gas reserves in the ground.
A signifcant part of the tax calculation derives
from an estimated price set for a prospective tax
year by the Kansas Department of Revenue; this
procedure represents another, less obvious, way
in which price risk can infuence the economics
of a well for Kansas producers. The other taxes
result from the severance tax and the production
tax (a conservation fee charged by the Kansas
Corporation Commission).
In summary, an oil and gas producer’s ultimate success
depends on replacing his reserves in a timely and eco-
nomic manner. Once each well’s production has declined
to the point that the revenues will no longer cover its
operating costs, the well has reached its economic limit—
despite the fact it may still hold recoverable oil or gas.
Once a well has reached its economic limit, the producer
must evaluate different options. One likely option will
involve plugging the well, removing the equipment, and
forfeiting the leasehold interest in the land on which
the well sits. In Kansas, the operator of a well has the
ultimately responsible for plugging it.
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Oil Natural Gas (Barrel of Oil Equivalent)
Kansas Rank in Oil Producton: 9th
Kansas Rank in Gas Producton: 10th
Chart 9
Total Oil and Gas Production by State, 2005-2009
Source: U.S. Energy Information Administration
12
Understanding Global
Price-Setting Mechanisms in
the Context of Integrated
Global Markets
Kansas producers must accept daily oil and gas prices
as an outcome beyond their control. Economists refer
to them as “price takers,” because they do not produce
enough oil or gas to have any infuence on global price-
setting mechanisms. For perspective, consider that
Saudi Arabia’s giant Ghawar oil feld produces about
fve million barrels per day.
13
That means the weekly
production from this one feld almost equals Kansas’
annual production of about 40 million barrels.
Chart 10 compares two widely traded crude oils with
a crude oil known as Kansas Common, one of a few
different types of Kansas crudes. The chart tells two
important stories relevant for Kansas producers, as price
takers. First, it shows that different crude oils tend to
have relatively stable spot-market price-spreads relative
to one another. Second, and more importantly, it shows
how closely world crude oil prices tend to move together.
West Texas Intermediate (WTI) and Brent (a blend of
crudes extracted from the North Sea) represent two of
the three primary crude oil benchmarks in the world
trading system. (The third is Dubai.) They trade more
than any other types of crude oil in the world, because
they form the basis for standardized futures contracts.
WTI is the benchmark crude for futures contracts traded
on the New York Mercantile Exchange. Such contracts
specify Cushing, Oklahoma as the physical delivery point,
although most futures contracts terminate without the
requirement of physical delivery.
Crude oils extracted from different geographies and
geologies have different physical and chemical proper-
ties. The establishment of benchmark crude oils helps
the world trading system set crude oil prices because
the benchmark crudes have well-defned physical and
chemical properties that market participants can use
for comparison against many other crude oils. The
13 http://en.wikipedia.org/wiki/Ghawar_Field
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WTI (Spot) Brent (Spot) NCRA--KS Common (Posted)
Chart 10
A Comparison of Prices for Select Crude Oils (2010$)
Source: U.S. Energy Information Administration; National Cooperative Re?nery Association
13
differences help determine prices because they have
practical importance for oil refners—the key customer
of oil producers.
Oil refning is a capital-intensive, chemistry-driven manu-
facturing process. Not all refneries have equal process-
ing capability, and changes to capability requires long
lead times for planning, capital investment, engineering,
and construction. The confguration of a given refnery
has signifcance for the processing required to proftably
refne the petroleum products that end-use consumers
demand. Consequently, refners do not necessarily view
different crude oils as perfect substitutes; they will value
different crudes differently.
Generally, refners will offer lower prices for crude oils
that require more processing to extract the petroleum
products most highly valued by end-use consumers.
Table 2 offers an example from the average per-barrel
prices posted in December 2011 by two Kansas-based
refneries, the National Cooperative Refnery Association
located in McPherson, Kansas and Coffeyville Resources
located in Coffeyville, Kansas. The posted prices indicate
the starting point for negotiations. Transportation costs
and other market factors will contribute to the fnal price
received by a given oil producer. Notice that, consistent
with Chart 10, Kansas Common trades at a price lower
than WTI. Also notice that the “sweet” crudes have
a higher offer price than the “sour” crudes, because
the sour crudes have more sulfur, which often requires
additional processing, and also often requires different
transportation and storage in order to keep it isolated
from sweet crude.
Table 2
Average December 2011 Posted Prices per Barrel
for Diferent Crude Oils
Crude Oil Type NCRA Coffeyville
Resources
Kansas Common $88.34 $88.34
Eastern Kansas 83.09 86.09
South Central Kansas n/a 90.59
Nebraska Intermediate 86.59 86.09
Oklahoma Sweet 89.09 94.98
Western Oklahoma Sweet 88.59 n/a
Oklahoma Sour n/a 82.59
West Texas Intermediate (WTI) 89.09 94.98
West Texas Sour 85.09 n/a
Wyoming Sweet n/a 86.34
Source: Company websites
The price ultimately received by an oil producer obvi-
ously matters from a business perspective. However, the
price spreads among different crudes tend to be relatively
stable. The price is much less stable.
PRICE RISK AS A FORM ON ENTREPRENEURIAL RISK
The large trading volume of WTI (and Brent) suggests
that it acts a price-setting mechanism for Kansas crude
oils. Chart 10, like Chart 3, illustrates the volatile nature
of oil prices, along with the tight co-movement among
WTI, Brent, and Kansas Common. The monthly price
movements of WTI and Kansas Common, for the
dates shown in Chart 10, have a statistical correlation
of 0.998, where 1.0 would mean perfect statistical co-
movement. The statistical co-movement of Brent and
Kansas Common would be just as tight if it were not
for the divergence of Brent from WTI starting in 2011;
a divergence that has an interesting meaning for world
oil markets, as discussed later.
Kansas producers’ price-taker status means that the
volatility of oil prices vividly captures the entrepreneurial
Exhibit 2
Select Operating Information for Kansas-Based Oil Refneries
National Cooperative Coffeyville Resources HollyFrontier
Re?nery Association LLC (CRV Energy) Corporation
Location McPherson Coffeyville El Dorado
Capacity (Barrels per Day) 87,000 115,000 135,000
Throughput of Kansas Crude (%) 57-69% 20-22% 0-5%
Primary Product Member-owned Arkansas, Iowa, Eastern Colorado
Marketing Area cooperatives in Kansas, Missouri, Nebraska, (including Denver),
North Central U.S. Oklahoma and South Dakota Eastern Wyoming,
Plains states.
Source: Company websites and spokespersons
14
challenge that Kansas oil (and gas) producers face in
controlling their price-related business risks. Statistical
research indicates that oil prices behave in a fashion
known as a “random walk,” meaning that the time path
of price changes can be characterized as a sequence of
random steps.
14
Producers can never confdently predict
from one period to the next whether the price will go up
or go down—or even if an upward or downward trend
will prevail. At any given point in time, the current price
of oil might be the most realistic forecast, regardless of
how far into the future producers choose to project.
Table 3
99% Confdence Intervals for Oil Price Forecasts
Forecast Years Forecast Lower Upper
into the Future Price Bound Bound
1 $89.53 $42.06 $177.72
2 89.53 29.93 224.96
3 89.53 22.70 270.65
4 89.53 18.25 310.89
5 89.53 14.47 360.56
ROI from
Example in Text 59% -2.85% 149%
But any particular oil price forecast could be wildly
wrong—and the imprecision becomes more amplifed
the further into the future the producer tries to forecast.
To construct an example, refer back to Chart 3. Suppose
a Kansas oil producer tried to forecast oil prices from
December 2011 forward. In that month (the last data
point in Chart 3), the average price of oil was $89.53.
Adopting the proposition that oil prices move as a ran-
dom walk, $89.53 is as good a forecast as any. However,
note the signifcant breadth of possible price ranges
captured by the statistical confdence intervals in Table
3. These confdence intervals derive from a computer
simulation of a random walk process informed by the
oil price data shown in Chart 3.
15
Statistically speaking,
the intervals represent the lower- and upper-bound of
the price ranges in which a producer could be 99 percent
confdent that the actual price would fall for a forecast
of from one to fve years into the future.
To put such unpredictability into an entrepreneurial
proft-or-loss perspective, consider a simplistic example.
Suppose that a Kansas producer intends to develop a
new stripper well that will produce with certainty 10
barrels of oil per day for fve years. Drilling the well
will cost $500,000 (see Chart 2). A forecast price of
$89.53 per year is a great price for Kansas producers (and
Kansas property tax appraisers): given the assumptions,
it offers the potential for a 59 percent rate of return on
the investment after fve years. However, if the example
uses the Table 3 per-year lower- and upper-bound price
instead of $89.53, the producer could face rates of return
on investment (ROI) ranging from -2.85 percent to 149
percent. Producers, as entrepreneurs, face substantial
fnancial risks—and the potential for handsome rewards.
(From a theoretical perspective, if the low price series
arrived, the producer could choose to keep the oil in the
ground, but the drilling costs will have been incurred, so
the rate of return on the investment will decline as time
elapses. From a practical perspective, however, a variety
of contractual arrangement related to land leases and
engineering issues related to well stewardship generally
make shutting in a well a cost-ineffective proposition.)
TRENDS IN THE GLOBAL CONSUMPTION AND
PRODUCTION OF OIL
The general inability to predict oil prices results from the
dynamic market processes taking place on a global scale.
Crude oils trade in integrated world markets. The forces
of global supply and demand set their prices. To make
that statement is easy. To understand it in detail is hard.
Market prices play two fundamental roles. At a macro
level, they act as a key mechanism for allocating scarce
resources to their highest-valued use. At a micro level,
they act as a vital tool for discovery; they act as the signal
by which millions of individual actors in the marketplace
make their decisions vis-à-vis all of the other actors. The
more visible outcomes at the macro level result from
the much less visible outcome of the millions of daily
decisions that take place at the micro level, where time-
and-place details and differences in perception matter.
Charts 11, Chart 12, and Chart 13, taken together, offer
a way to summarize what has taken place at the macro
14 James D. Hamilton, “Understanding Crude Oil Prices,” The Energy Journal, Vol. 30, No. 2, 2009, p. 181.
15 The simulation generated 10,000 different price observations using a model of geometric Brownian motion for each of the forecast
years. The monthly percent change in the price series has a standard deviation of 8.1%.
15
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Chart 12
Oil Consumption-Production Gap and Oil Price (2010$)
Source: BP Statistical Review of World Energy, June 2011; Center for Applied Economics, KU School of Business
30
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Chart 11
World Oil Production and Consumption
16
level of the world crude oil market over the past few
decades. The rapid escalation—and rapid collapse—of
world oil prices between 2004 and 2009, shown in Chart
12, offers a useful case study for learning the global oil
price-setting mechanisms. The discussion will build out
the case study over the next several sections, as appropri-
ate. The macro story suggests that the price escalation
has explanations grounded in the fundamentals of supply
and demand—not the activity of “speculators” often
discussed in the popular media.
Chart 11 compares total world oil consumption with
total world oil production. Notice the gap between the
two curves. Before the early 1980s production exceeded
consumption; then consumption began to exceed pro-
duction. Stored inventories (stocks) of crude oil make
possible the levels of consumption that exceed produc-
tion. Inventory management is a fundamental aspect of
petroleum markets—and the level of inventories plays a
role in the global price-setting mechanism for crude oil.
Chart 12 compares two tends: (1) the trend in world oil
prices (based, since 1984, on Brent at specifc shipping
dates) and (2) the gap between consumption and produc-
tion, derived from Chart 11.
Volatility in the consumption-production gap has some
relationship to the volatility of prices. A larger gap
means that consumption grew relative to production,
suggesting that demand grew relative to supply, result-
ing in higher prices (and vice versa). For example, from
1965 to 1972, production levels exceed consumption
levels and oil prices remained low and stable. In October
of 1973, several oil-producing Arab countries declared
an oil embargo to protest U.S. support for Israel in the
Yom Kippur War. The price spiked in anticipation of
the reduced supply and then receded as more knowledge
became available about market conditions. The same
thing happened in 1979 and 1980 in the context of the
Iranian Revolution and the Iran-Iraq war. The higher
prices (and uncertainty of future supplies) motivated
non-Arab countries to increase exploration and produc-
tion (see Chart 13). That response ended up producing
an oil glut in the 1980s that signifcantly reduced prices
until the 2004-2009 events discussed below.
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Producton--OPEC Producton--Non-OPEC
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Chart 13
Trends in World Oil Production and Consumption
Source: BP Statistical Review of World Energy, June 2011; Center for Applied Economics, KU School of Business
17
Chart 13 provides a broad indication of who was doing
the consuming (demanding) and producing (supplying).
It provides relative growth trends for consumption and
production. Two curves show consumption trends for
countries belonging to the Organization for Economic
Co-operation and Development (OECD), generally the
more industrialized countries, and all those not belong-
ing to the OECD. Two other curves show production
trends for countries belonging to the Organization of the
Petroleum Exporting Countries (OPEC) and all those
not belonging to OPEC.
In 1990, non-OECD countries represented about 37 per-
cent of world oil consumption; by 2010, they represented
about 47 percent. On a 2010 consumption-weighted
basis, the top-fve non-OECD countries in terms of the
1990-to-2010 growth of oil consumption were: China,
India, Saudi Arabia, Brazil, and Iran.
Saudi Arabia and Iran are also two key members of
OPEC. The economic growth of many OPEC countries
has resulted in them consuming an increasing share of
their domestic oil production. OPEC countries supplied
about 41 percent of world production in 2010. As the
chart suggests, OPEC has steadily resumed a larger share
of world production following the oil glut of the 1980s.
DETAILS RELATED TO OIL SUPPLY
Recall, with reference to Chart 11, that crude oil invento-
ries must account for the gap between oil consumption
and oil production. From 1998 to 1999, inventories
increase signifcantly and then begin to shrink, in fts
and starts, until 2004. Chart 12 shows that the price
of oil responded as expected, dropping and then rising,
based on the fuctuation in the gap. Chart 13 shows that
OPEC production leveled-off from its past growth at
exactly the same time.
The post-1998 events began with a March 1998 meeting
of OPEC and certain non-OPEC countries (Mexico,
Norway, and Russia). Saudi Arabia and Venezuela con-
vened the meeting. The Saudis, with full support from
Venezuela, made it clear that they would act to further
drive down prices if the group did not embrace the
Saudis’ desire to engage in a program of production
control aimed at boosting the price of crude oil. The
group complied.
16
Interestingly, however, cuts in OPEC oil production
per se did not cause the increase in oil price, as intuition
might suggest. Instead, Saudi Arabia (and others) opera-
tionalized the OPEC effort by working to manage the
world’s crude oil inventories. This approach highlights
an important institutional feature of world oil markets—
and OPEC’s market power.
17
Unlike Kansas producers, who are price-takers, Saudi
Arabia and other OPEC producers are price-makers.
They announce the price at which they will sell (set as a
fxed spread relative to well-defned market benchmarks,
like WTI and Brent) and purchasers react to the admin-
istratively set price spread(s).
The 1998 price drop resulted from an increase in sup-
ply represented by a gradual build-up of oil inventories.
The low prices motivated the Saudis to call their OPEC
meeting. Price drifted higher, as shown in Chart 12, as
OPEC’s higher asking prices worked to manage (reduce)
world inventories (as shown in Chart 11). The drop in
OPEC production resulted from the drop in purchases
triggered by OPEC’s price-setting policies, as purchas-
ers found it more economical to draw down inventories.
The Saudi-led program worked as designed.
18
A sharp
drop in inventories occurred in 1999. After that, inven-
tory levels generally grew in absolute level, but at rates
slower than the rate of the growth of oil consumption.
19
An important economic issue related to oil supply is the
responsiveness of producers to price changes, particu-
larly price increases. Economists use the term “price
elasticity” to characterize the idea of responsiveness.
The so-called law of supply says that, all else equal, pro-
ducers will increase the quantity supplied of oil as the
price increases (and vice versa). Supply is “inelastic” if
16 Philip K. Verleger, Jr., “Anatomy of the 10-Year Cycle in Crude Oil Prices,” March 2009, p. 6. https://www.theice.com/publicdocs/
globalmarketfacts/docs/newsexperts/Anatomy_of_Price_Cycle_0309.pdf
17 Ibid., p. 7.
18 Ibid., p. 12-13.
19 http://www.eia.gov/emeu/international/oilstocks.html
18
a one percent increase in price results in less than a one
percent increase in quantity supplied. Supply is “elastic”
if a one percent increase in price results in more than a
one percent increase in quantity supplied.
The notion of the elasticity of supply has a short run
and a long run perspective. Producers cannot respond
immediately to a demand-driven price increase if they
already have their wells producing at their maximum
fow rates. In such a situation, producers must drill new
wells to respond to an increase in demand. That takes
time and money, which highlights two important points.
First, economists generally expect a much more inelastic
price elasticity of supply in the short run compared to the
long run (depending on the excess production capacity
of existing wells or oil in storage). The more inelastic
the supply response relative to demand-driven changes
in price, the more price volatility market participants
will experience. Second, demand-driven price increases
make it possible to proftably explore for and produce
more expensive sources of supply. (Recall that proft-
able production with known technology is a defnitional
component of the “proved reserves” of oil or gas.) This
point is important for Kansas producers, because they
face much higher incremental production costs than
many of the world’s produces.
Chart 14 shows that the law of supply operates as
expected in the state of Kansas. (Charts 12 and Chart
13 helped show that it also operates as expected globally.)
The chart compares infation-adjusted annual average oil
prices that Kansas producers received at the wellhead
with the combined number of oil wells, service wells,
and dry holes drilled one year after the year of the price
reported on the chart. For example, the “2010” data
point shown on the chart indicates that the price in 2010
($72.43 per barrel) and the combined number of wells
drilled in 2011 (3,843).
Examination of Chart 14 provides some insight into
the time dimension associated with the Kansas price
elasticity of supply. Oil prices escalated signifcantly in
the 1970s—and peaked in 1980. Notice the escalating
response in wells drilled (keeping in mind the year-after-
price interpretation of the chart) resulting from prices
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 2002
2003
2004
2005
2006
2007
2008
2009
2010
$0
$20
$40
$60
$80
$100
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
K
a
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Non-Gas Wells Drilled One Year Afer Price Year Shown on Chart
Chart 14
Kansas Wellhead Oil Price (2010$) and Non-Gas Wells Drilled One Year Later
Source: U.S. Energy Information Administration; Kansas Geological Survey
19
reported for 1978 through 1981, and the rapid drop in
drilling once it became clear prices had begun to fall.
The same general pattern resulted for the 2004 through
2011 episode, but the price increases happened quickly
and in a somewhat erratic fashion, so producers did not
demonstrate as strong a response as in the 1970s episode.
(Recall also from Chart 1 that Kansas producers drilled
signifcantly fewer dry holes in percentage terms in the
more recent time period.)
PHYSICAL MARKETS AND PAPER MARKETS: PRELUDE
TO DISCUSSION OF OIL DEMAND
“Speculators” often receive the blame for episodes of
commodity price increases—like the oil price surge from
2007 to 2008 shown in Chart 12. Investigations into such
charges usually reveal that market fundamentals related
to supply and demand provide the more compelling
explanations of price movements. A basic understanding
of the institutional mechanisms that support “specula-
tion” helps to explain why.
Crude oil, along with many other commodities, trades
in physical markets and “paper” markets. The physical
market represents the actual handling, processing, and
movement of crude oil and refned petroleum products.
The paper market primarily represents the buying and
selling of oil-based futures contracts (and related fnan-
cial derivatives). With regard to “speculators” causing
sudden price changes, one point deserves emphasis: the
paper market works in a way that has no automatic spill-
over infuence on the activity in the physical market—the
actual supply of and demand for oil.
Futures markets generate enormous benefts for the
buyers and sellers of commodities. They serviced the
market for agricultural products for more than a century
before being applied to the markets related to oil and gas.
A futures contract is simply a business deal between
two or more parties: for example, an obligation to
deliver a specifed volume of crude oil at a specifed
place and time for a specifed price. Commodity futures
exchanges—like the Chicago and New York Mercantile
Exchanges—create the institutional foundation for the
creation and trade of futures contracts (the futures mar-
ket). The exchanges standardize contracts, oversee rules
for orderly trading, and act as clearinghouses for contract
settlements. Participants in the physical markets typi-
cally also act as participants in the paper market. Many
participants in the paper market never participate in the
physical market, because the institutional features of the
exchanges make it possible for anyone to participate in
futures markets without having to ever physically handle
the commodities that form the basis of the futures
contracts; they can settle their contracts for cash. This
institutional feature helps explain why activity in the
futures market determines the price of futures contracts,
but not necessarily the price of the underlying commodi-
ties. Each market—the physical and the paper—has its
own fundamentals.
Markets aggregate information and embed it into a
single metric: price. The information built into the price
embodies the unique perspectives of all participants in
the market. The price, in turn, provides feedback that
further infuences the unique perspectives of the market
participants. It is an on-going, iterative process. Markets
are institutions that discover the prices that best allocate
resources to their highest-valued use (and users).
The notion of markets as a price-discovery process
makes the practical difference between the terms
“speculator” and “entrepreneur” almost meaningless,
from an economic perspective. A Kansas oil and gas
producer that decides to drill a wildcat well can just as
easily be called a “speculator” as an “entrepreneur.”
An oil trader in New York City who believes that “the
market” is underpricing oil because it is underestimat-
ing the demand for heating oil—and buys oil futures
based on an expectation that oil prices will eventually
rise—can just as easily be called an “entrepreneur” as
a “speculator.” The risk-based calculation driving the
action of each participant feeds information into the
market that infuences the price of oil, and thereby helps
the other participants make better risk-based calculations
for decision-making.
Research on the interaction between physical markets
and paper markets helps confrm the symbiotic rela-
tionship between the physical and paper markets. One
(imperfect) way of testing for causality is to determine
what comes frst: “speculative” trades in the paper market
20
for oil or spot price increases in the physical market for
oil. The tests tend to show that the two items often
switch places. Price discovery often takes place in the
paper market, but trades in the paper market often react
to changes in the physical market.
20
Futures contracts and well-functioning futures markets
have several noteworthy attributes:
1. Participants in the physical market for crude oil (or
any other commodity) use them as a tool to manage
price risk. Through a process called hedging (buy-
ing futures contracts that specify future prices) oil
producers or oil buyers can secure a known price to
help business planning. The presence of “specula-
tors” in the futures market reinforces this benefcial
process rather than undermines it.
2. Hedging helps producers, as entrepreneurs, because
the ability to manage price risk makes it easier to
secure investment capital for new projects.
3. By mechanical necessity of the way futures contracts
work (a guaranteed price at a guaranteed time), the
market price of a particular futures contracts will
always converge to the spot price of the underlying
commodity at the time the contract expires. In the
futures market, every gain is matched by a loss (and
vice versa). The net fnancial result of every trade
nets to zero from the perspective of the futures
market—usually in the context of a cash settlement.
Consequently, there is nothing about the supply and
demand for futures contracts that inherently infu-
ences the supply and demand for physical crude oil
(or any other commodity); meaning that there is
nothing inherent in the activity of futures markets
that infuences the (spot) price of oil.
4. Trading activity in the futures market can only infu-
ence the spot price of crude oil if the price signals
in the futures market convince participants in the
physical markets to alter production rates or change
20 Bahattin Büyüksahib and Jeffrey H. Harris, “Do Speculators Drive Crude Oil Futures Prices?” The Energy Journal, Vol. 32, No. 3,
2011, pp. 167-202.
$58.89
$59.14
$60.83
$62.07
$63.00
$79.92
$79.63
$78.47
$77.45
$76.71
$50
$55
$60
$65
$70
$75
$80
$85
Spot Contract 1 Contract 2 Contract 3 Contract 4
D
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October 2006 September 2007
Chart 15
Examples of Contango and Backwardation in the Futures Market for West Texas Intermediate Crude Oil
Source: U.S. Energy Information Administration
21
net inventory levels to an extent suffcient to alter
supply enough to change prices.
The last point is critical to understanding whether or
not “speculators” caused, in whole or in part, the oil
price surge from 2006 to 2008. Chart 15, Chart 16, and
Chart 17 provide useful perspectives for evaluating the
situation.
Chart 15 is educational in nature for those readers
uninitiated with futures markets. It shows two different
months in the 2006-to-2008 time frame—one month
(October 2006) when the futures market for WTI was
in “contango” and one month (September 2007) when
it was in “backwardation.” Contango refers to a situa-
tion in which the contact price for WTI is higher in the
future than the present. Backwardation refers to the
opposite situation—the contract price for WTI is lower
in the future than the present. When markets move into
contango, an economic incentive arises to hold crude
oil inventories (which could include storing crude in
the ground by deferring production). For example, in
simplest terms, in October 2006, someone could buy a
barrel of WTI for $58.89 and sell it four months later for
$63.00. This plan would make sense if the price spread
covered all of the costs associated with holding the crude
oil. The level of the price does not matter—only the
price spread matters.
Chart 16 demonstrates that the market generally behaves
as theory predicts. It shows four data series:
1. The 3
rd
month WTI futures price less the WTI spot
price.
2. The volume of crude oil inventories (stocks) held in
the Petroleum Administration for Defense District
(PADD) 2, which includes Cushing, Oklahoma,
the delivery point for WTI futures contracts. The
volumes exclude those held in the U.S. government’s
Strategic Petroleum Reserve, in order to better cap-
ture private business activity. (The stock levels have
been arbitrarily, but proportionately, compressed to
0
1
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B
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)
Contract 3 less Spot PADD 2 Stocks ÷ 30 Million
Avg. Stock Level (before 2009) WTI Spot Price (Log Form)
Chart 16
Relationship among Futures Curves, Crude Stocks, and WTI Spot Prices
Source: U.S. Energy Information Administration
22
allow for a visually convenient comparison against
other data series.)
3. The average (adjusted) PADD 2 stock levels
before 2009, for purposes of establishing a visual
benchmark.
4. The WTI spot price, charted in natural logarithm
form for visual convenience.
When the WTI futures market has been in contango
(blue bars above $0.0), oil inventories have tended to
increase. When the market has been in backwardation,
oil stocks have tended to decrease. Over the time period
presented, PADD 2 oil stocks and the price spread reg-
istered a statistical correlation coeffcient of 0.6.
The relationship between the WTI spot price and inven-
tory levels also behaves in the expected manner—up until
about the end of 2004, the beginning of the case study
under discussion. Generally speaking, all else equal, spot
prices should increase when crude oil inventory declines,
because supply becomes more constrained in the short
run. Conversely, spot prices should decline when crude
oil inventory increases. That pattern generally holds in
Chart 16. From 1986 through 2004, the spot price and
inventory levels register a statistical correlation of -0.67.
From 2005 forward, the coeffcient shifts to +0.2.
Most importantly for the case study, notice that the
futures market moves into contango from the start of
2005 through the summer of 2007. This period corre-
sponds to a large volume of new trading in the futures
market based on the development of new financial
products offered on Wall Street.
21
It also corresponds
with a sustained increase in the spot price. This corre-
spondence explains why so many commentators claimed
that “speculators” drove the price increase.
Yet the price continued to escalate after the market
shifted into backwardation. True, inventory levels
decreased which suggests that the spot price should
rise. However, the inventory levels remained well within
21 Philip K. Verleger, Jr., “The Role of Speculators in Setting the Price of Oil,” Testimony before the U.S. Commodities Futures Trad-
ing Commission, August 5, 2009.
0.75
1.00
1.25
1.50
1.75
2.00
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=
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)
PADD 2 Stocks U.S. Stocks less PADD 2 OECD Stocks less PADD 2
Chart 17
Relative Volatility of Select Regional Crude Oil Stock Levels
Source: U.S. Energy Information Administration
23
the range refected in Chart 16, when prices were much
lower.
Chart 17 provides an additional perspective on crude oil
inventories. PADD 2 inventories show much more vola-
tility than the rest of the United States, and much more
volatility still with respect to the entire OECD. PADD
2 is somewhat unique in that it is the delivery point for
WTI futures contracts. Although Chart 10 showed that
different crude oils tend to move together—and that
benchmark crudes can be expected to lead the price
movements, total inventories should matter for global
supply. Plus, Brent is traded (and delivered) in Europe.
Recall from the above discussion on supply that OPEC
countries had had success in managing global inventories
with its pricing policies. In that context, OECD inven-
tory levels were quite stable during the price escalation,
which is among the reasons that many commentators
dismiss the speculator-did-it story. Professor James
L. Smith captured this viewpoint (and summarizes the
arguments made above): “The only avenue by which
speculative trading might raise spot prices is if it incites
participants in the physical market to hold oil off the
market—either by amassing large inventories or by shut-
ting in production. If participants in the physical market
are convinced by speculative trading in the futures market
that spot prices will soon rise, their reaction could cause
inventories to rise and/or production to fall. However,
neither phenomenon was observed during the recent
price spike.”
22
IMPORTANT DETAILS RELATED TO OIL DEMAND
Philip K. Verleger, Jr., a highly accomplished petroleum
economist, has developed a compelling, well-docu-
mented narrative explaining the rapid 2006-2008 oil price
increase.
23
He argues that the primary catalyst came from
the implementation of ultra-low-sulfur diesel fuel regula-
tions in the United States and Europe. Understanding
his arguments—and understanding price volatility, in
general—frst requires understanding a few economic
prerequisites related to petroleum demand.
The demand for oil is a derived demand. End-consumers
demand refned petroleum products not crude oil per
se. The demand for these products works backwards
through the refning industry to the producers of crude.
Consequently, an underappreciated fact of the petroleum
market is that the prices of petroleum products (like
gasoline, diesel fuel, or jet fuel) generally determine the
price of crude oil(s), not vice versa.
24
The interaction
of supply and demand determines market prices. But
supply follows demand. Oil refners continually assess
consumer demand for refned product and then seek
to procure oil at a price low enough to generate a suf-
fcient proft.
This observation has general importance for understand-
ing oil prices—and has a particular importance for the
2006 to 2008 oil price spike shown in Chart 12. The
general importance relates to what economists refer to
as the (1) income elasticity of demand and (2) the price
elasticity of demand. The particular importance relates
to how refners had to respond to particular environmen-
tal regulations (and how the response interacted with the
price elasticities of supply and demand).
Income elasticity of demand relates to the responsive-
ness of a change in demand resulting from a change in
income; specifcally, it calculates the percentage change in
demand that results from a one percentage point change
in income. In the context of this report, this metric
helps explain the price-increase story told by Charts 11,
Chart 12, and Chart 13. Research shows that the income
elasticity of petroleum-related products hovers around
a value of one, meaning that a one percent increase in
income results in a one percent increase in the demand
for petroleum products (and thus oil). However, in
recent decades, the income elasticity appears much higher
(more responsive) in developing countries compared to
developed countries.
25
This fnding helps explain the
22 James L. Smith, “World Oil: Market or Mayhem?” Journal of Economic Perspectives, Vol. 23, No. 3, 2009, p. 159.
23 This section draws liberally from three works: Philip K. Verleger, Jr., “Anatomy of the 10-Year Cycle in Crude Oil Prices,” March
2009; Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” Business Economics, Vol. 46, No. 2, April 2011, pp.
71-82; Philip K. Verleger, Jr., “Rising Crude Oil Prices: The Link to Environmental Regulations,” Business Economics, Vol. 46,
No. 4, September 2011, p. 240-248.
24 Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” Business Economics, Vol. 46, No. 2, April 2011, p. 78.
24
relative growth differences in oil consumption by the
OECD and non-OECD countries illustrated in Chart 13.
The price elasticity of demand shares all of the same
defnitional characteristics as the price elasticity of sup-
ply (discussed above)—except that there is an inverse
relationship between price and quantity demanded.
The so-called law of demand states that, all else equal,
end-consumers will decrease the quantity demanded
of petroleum products—and thus oil—as the price
increases (and vice versa). Like the elasticity of supply,
the quantity demanded for specifc petroleum produces
tends to be much more inelastic (unresponsive to price)
in the short run than the long run. In the long run,
consumers have much more opportunity to alter their
overall consumption behavior.
Income elasticity tends to be much more important than
price elasticity in determining the quantity demanded
for petroleum products.
26
However, the relative inelas-
ticity of both demand and supply for petroleum works
together in important ways in the context of price
volatility. For example, a short run price elasticity of
demand for petroleum of -0.065 would be consistent
with the fndings of current research.
27
That means a
one percent increase (decrease) in price would result in a
0.065 percent decrease (increase) in quantity demanded.
Making an assumption that the elasticity of supply has
the same measured value of 0.065, implies the following
equation to calculate the price increase required to make
demand and supply balance in the context of a shock to
oil supply—say the loss of one percent of world supply
(or, for example, the equivalent of about 20 percent of
the supply that comes from Iran):
From the price forecasting example above, recall that the
December 2011 Kansas wellhead price of oil was $89.53.
A price increase of 7.7 percent would amount to $6.89
per barrel. If the oil shock amounted to fve percent
of supply—or roughly all of Iran’s production—the
price increase would be 5 x 7.7% = 38.5%, or $34.47
per barrel. The point: inelasticity makes small percent-
age changes in supply result in much larger percentage
changes in price—explaining how price volatility can
result from market fundamentals without the need to
blame “speculators.”
ENVIRONMENTAL REGULATIONS: AN EXPLANATION
OF THE PRICE SPIKE OF 2006-2008
The discussions above related to supply and demand
prepare the reader for Philip Verleger’s explanation for
the price spike of 2006-2008. It provides a case study
in the complex global dynamics that drive oil prices. He
summarizes his analysis by arguing that “the determina-
tion of oil prices depends not only on the demand level
but also on the mix of crudes, the industry’s capacity to
process the crudes, and the decisions by oil-exporting
nations on the volume of sour crude produced.”
28
The following points summarize Verleger’s logic in more
detail:
• The marginal buyer in the marginal market sets
the price for petroleum products and therefore
the price of crude oil. Conceptually, the mar-
ginal demander in a market is that entity bidding
for the last barrel available and the marginal
supplier in a market is the entity fulflling that
demand (at a price suffcient to cover all of
the economic costs involved). Identifying the
marginal actors in the market at any given point
in time presents a challenge, particularly on the
demand side. Often, the high-cost suppliers act
as the marginal supplier because the marketplace
has exhausted the less costly alternative sources
of supply. However, the marginal supplier could
be the supplier with excess production capacity.
25 See the references in James D. Hamilton, “Understanding Crude Oil Prices,” The Energy Journal, Vol. 30, No. 2, 2009, p. 190.
26 Louis H. Ederington, Chitru S. Fernando, Thomas K. Lee, Scott C. Linn, and Anthony D. May, “Factors Infuencing Oil
Prices: A Survey of the Current State of Knowledge in the Context of the 2007-08 Oil Price Volatility,” August 2011, p. 8.
http://205.254.135.24/fnance/markets/reports_presentations/factors_infuencing_oil_prices.pdf
27 Hamilton, “Understanding Crude Oil Prices,” p. 190.
28 Philip K. Verlerger, Jr., “Rising Crude Oil Prices: The Link to Environmental Regulations,” p. 245.
25
Verleger argues that, with regard to transporta-
tion fuel, the United States is the marginal mar-
ket for gasoline, Europe is the marginal market
for diesel fuel, and Asia is probably the marginal
market for jet fuel.
29
Each of these competing
demands for different “cuts” of refned crude
oil infuences the market price—at the mar-
gin—for a given barrel of crude oil. As Verleger
says: “Generally, the product in shortest supply
in the market most dependent on imports [the
high-cost source of supply] will effectively set
prices globally.”
30
• Crude oils from around the world have different
chemical properties. For purposes of Verleger’s
narrative, but oversimplifed in reality, the world
produces two types of crude oil: light-sweet
and heavy-sour. The light-heavy continuum
relates to the density of the oil, or how easily it
fows. Light crude fows more easily because
it has a higher concentration of fuel-grade
hydrocarbons, which, in turn, makes it yield
more end-consumer products with less pro-
cessing. The sweet-sour continuum relates to
sulfur (sour) content. As discussed above, two
key benchmark crudes for the futures market
are West Texas Intermediate and Brent, both
of which have light-sweet characteristics. Oil
from OPEC countries tends to have heavy-sour
characteristics, which trades at a price discount
to light-sweet crudes.
Despite the different chemical properties, dif-
ferent crude oils compete in highly-competitive,
integrated markets—which establish on-going,
but fuctuating, price differentials among the
different crudes. However, OPEC, as discussed
above, has pricing power and can administra-
tively restrain the price differential between
light-sweet and heavy-sour crudes that might
arise in the context of a more competitive
market structure. OPEC, and especially Saudi
Arabia, in effect, has the ability to position itself
as the marginal source of supply, and set price
discounts relative to the actively traded WTI and
Brent crude oils.
• These differences in crude oil characteristics
matter to oil refners from a processing per-
spective. Different crudes produce different
proportions of end-products depending on
the amount and type of processing required.
Refners have a deep understanding of these
differences and bid for crude oil from produc-
ers based on the expected product prices they
can proftably charge end-consumers for the
different petroleum products. That is why,
ultimately, the direction of causality for crude
oil prices runs from end-use demand to crude
oil, not vice versa.
Table 4
Comparison of Refnery Distillation Yields and
Other Characteristics
Nigerian Saudi Arabian
Type of Product Bonny Light Arab Heavy
LPR (%) 0.9 2.8
Light Gasoline (%) 4.3 0
Light Naphtha (%) 13.4 6.7
Intermediate Naphtha (%) 0 8.7
Heavy Naphtha (%) 10.1 0
Kerosene (%) 13.3 7.0
Gasoil (%) 22.7 12.5
Intermediate Gasoil (%) 0 9.7
Residual Fuel Oil (%) 39.1 52.6
Sulfur Content Residual Fuel Oil (%) 0.3 4.1
Sulfur (Kilos per Barrel) 0.2 4.1
Total Gasoil Potential (%) 36.0 29.2
Source: EIG, International Crude Oil Handbook, 2010. Repro-
duced from: Philip K. Verleger, Jr., “Rising Crude Oil Prices: The
Link to Environmental Regulations,” Business Economics, Vol. 46,
No. 4, September 2011, p. 244.
Table 4 provides a snapshot of the relevant
refning chemistry. It compares the distillation
(refnery) yields of two crudes: so-called Bonny
Light crude oil from Nigeria, which is among
the lightest, sweetest crudes, and so-called Arab
Heavy from Saudi Arabia. Refneries not well
equipped to process heavy-sour crudes can pro-
duce much more diesel-type fuels (those Table
4 items in bold text) from Bonny Light. Just
as importantly, the amount of sulfur refners
must remove from Bonny Light is much lower
29 Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” Business Economics, Vol. 46, No. 2, April 2011, p. 72.
30 Ibid.
26
than from Arab Heavy—making it much less
expensive to meet the ultra-low-sulfur diesel fuel
regulations implemented in the United States
and Europe.
Not all refners have equal capacity to refne all
crude oils with equal effciency of outcome. For
example, refners must build the expensive engi-
neering processes required to effciently process
heavy crude oils and remove sulfur from refned
products. Furthermore, the physical location of
refneries with different processing capabilities
matters in the price-setting process. Physical
volumes depend on physical processing capac-
ity and transportation, and the cost structures
related to both.
• European consumers—helped along by public
policy incentives—have gradually shifted from
gasoline to diesel as a preferred transporta-
tion fuel. About 75 percent of vehicles sold
in Europe have diesel engines. Europe is the
marginal market for diesel fuel. (Verleger argues
that this status—and the higher demand for
light-sweet crudes that it implies—explains the
divergence in the Brent-WTI spread discussed
in the context of Chart 10.)
• In 2000 and 2003, the United States and Europe,
respectively, implemented ultra-low-diesel fuel
regulations that became binding in June 2006
and January 2009. According to Verleger:
“European refners did not respond to this situ-
ation by adding capacity to produce more diesel.
Instead, they shut down facilities.”
31
Europe had
to import the diesel that it could not produce
itself. Much of the imported supply came from
the United States (because U.S. end-consumers
had begun to substitute natural gas for distil-
late fuel oil). Furthermore, Europe’s position
as the marginal market meant that the marginal
demand for diesel was denominated in Euros,
which traded at a premium to dollars, thereby
bidding up the dollar price of diesel (by about
16 percent, according to Verleger).
• The implementation of the ultra-low-sulfur-
diesel rules increased the demand for the world’s
sweet crudes, which represent a fraction of
world supply. At the same time, (1) the civil
conficts in Nigeria had reduced the produc-
tion volumes of its Bonny Light (a key source
of light-sweet supply) and (2) the United States
chose to add to its Strategic Petroleum Reserves,
removing even more sweet crude from the mar-
ket. (At this point it is important to recall the
discussion above about the magnifying infuence
on oil prices that results from inelastic demand
and supply. The margins of the market during
the 2006-2008 episode resulted from inelastic
demand for diesel fuel produced from tight
supplies of light-sweet crude, which accounts
for a fraction—about 40 percent or less—of
world crude production.)
The pricing policies of OPEC countries (dis-
cussed above in the section on supply) amplifed
the oil-supply constraints. Recall that OPEC
producers administratively set price differentials
for their crude based on the price of benchmark
crudes (which tend to be lighter and sweeter).
“The resulting prices,” argues Verleger, “bear
no relationship to what would prevail in a free
market.”
32
Charts 11 and Chart 13 clearly show
the slow-down in the rate of OECD crude
oil consumption—and the concurrent slow-
down in crude oil production—resulting from
OPEC’s artifcially-high price for heavy-sour
crude relative to light-sweet crude.
• Several factors contributed to the sharp drop
in price from 2008 to 2009: the 2007 recession
reduced consumption in OECD countries (see
Chart 13); the U.S. Congress forced the Depart-
ment of Energy to stop flling the Strategic
Petroleum Reserve, thereby releasing supply;
the Euro dropped against the dollar, thereby
31 Philip K. Verleger, Jr., “The Margin, Currency, and the Price of Oil,” p. 75.
32 Philip K. Verlerger, Jr., “Rising Crude Oil Prices: The Link to Environmental Regulations,” p. 245.
27
dropping dollar-denominated prices for oil; new
Gulf of Mexico sources for light-sweet crude
came on line; and refners responded to the high
price of diesel by changing operation in a way
that increased supply.
THE CO-MOVEMENT OF OIL AND NATURAL GAS
PRICES
The physical attributes of natural gas—its gaseous
nature—makes it a geologically and commercially dis-
tinct product from oil. Natural gas can be liquefed,
but that process is expensive. So the piping and storage
infrastructure required to bring natural gas from the
wellhead to the end consumer tends to give it a regional-
market character from a supply and demand perspective,
as opposed to the globally-integrated market character
of oil.
That said, however, the natural gas infrastructure in the
United States is at a mature stage—with many regional
inter-connections. One recent investigation identifed
eight regional markets for natural gas (from a price-
setting perspective) and concluded that “the Canadian
and U.S. natural gas market is a single highly integrated
market.”
33
This market integration, the investigating
economists argued, means that the 1970s deregulation
of the natural gas market worked. Price signals now do
the job of effciently allocating natural gas to its highest-
valued uses.
Domestic U.S. natural gas production accounts for
about 90 percent of U.S. consumption. The remainder
is mostly imported from Canada. (A small amount of
liquid natural gas is imported from a variety of countries
around the world.
34
) As with oil, the fundamentals of
supply and demand drive the price of natural gas.
33 Haesun Park, James W. Mjelde, and David A. Bessler, “Price Interactions and Discovery among Natural Gas Spot Markets in North
America,” Energy Policy, Vol. 36, 2008, p. 290.
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Kansas Crude Price (per Barrel) Natural Gas Spot Price (per Barrel of Oil Equivalent)
Chart 18
Prices for Kansas Crude and Natural Gas (per Barrel, 2010$)
Source: Independent Oil and Gas Service, Inc. (Red Top News)
28
Chart 18 offers one way to display the relative price
trends between oil and natural gas. It shows the price of
Kansas crude and the (Panhandle Eastern Pipeline) spot
price of natural gas on a barrel-of-oil-equivalent basis.
Note the much greater volatility of the natural gas price
series. Also note the obvious break in co-movement
between the two price series in January 2010 (as noted
above in connection with Chart 3). Many researchers
have argued that the co-movement began to weaken
many years before that.
The barrel-of-oil-equivalent price shown in Chart 18
hints at an important principle with regard to natural
gas and oil prices co-movements: residual fuel oil and
distillate fuel oil (both refned from oil) and natural gas
compete as alternative fuel sources in both a business-
input and residential-consumption context. The stability
of the substitution relationship will ultimately act as the
economic mechanism driving the stability of the price
co-movement relationship. As discussed above in the
context of oil prices, the marginal user’s perceived sub-
stitution opportunity reacts to—and thereby sets—the
market price differential between oil and natural gas.
Economists Stephen Brown and Mine Yücel have docu-
mented two rules-of-thumb used in the energy industry:
the 10-to-1 rule and the 6-to-1 rule.
35
The former tends
to hold up in certain historical circumstances. The lat-
ter roughly refects the energy content differences in a
barrel of oil and a natural gas barrel-of-oil equivalent.
Oil is typically priced by the barrel (42 gallons) and
natural gas is typically priced in units of 1,000 cubic
feet. The energy content of 5,800 cubic feet of natural
gas approximates the energy content in a barrel of oil
(and a barrel of distillate fuel oil); 6,287 cubic feet of
natural gas approximates the energy content in a barrel
of residual fuel oil—hence the general 6-to-1 price rule.
(Chart 18 makes use of this rule.) Neither of these two
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Chart 19
U.S. Monthly Natural Gas Consumption and Production
Source: U.S. Energy Information Administration
34 BP Statistical Review of World Energy, June 2011
35 Stephen P.A. Brown and Mine K. Yücel, “What Drives Natural Gas Prices?” The Energy Journal, Vol. 29, No. 2, 2008,
p. 45-60.
29
rules-of-thumb predicts natural gas prices with impres-
sive accuracy. The 10-to-1 rule tends to underestimate
the actual price and the 6-to-1 rule tends to overestimate
the actual price.
Another basic formula—the burner-tip parity rule—
offers a more sophisticated version of the 6-to-1 rule.
As discussed above in the context of oil prices, the price
of oil (and therefore its infuence on the price of natural
gas) runs from the end user of the fuel back to the well-
head. The demand is a derived demand, so the burner-tip
parity rule idea suggests that each consumer (primarily
industrial consumers) assesses the economics of using
competing fuels and picks the most cost-effective fuel.
The choice works its way back to the wellhead as a price
signal. The burner-tip parity rule produces a somewhat
tighter co-movement relationship between oil and natural
gas relative to the 10-to-1 or the 6-to-1 rule.
Each of the three rules, however, is imperfect—and each
completely breaks down in a manner consistent with
the break in the co-movement of oil prices and natural
gas prices shown in Chart 18. The imprecision occurs
because of the substantial amount of short-run volatility
in natural gas prices. The structural break occurs primar-
ily in connection with the recent surge in unconventional
(shale) natural gas production.
Chart 19 illustrates why the price of natural gas tends to
be much more volatile than the price of oil: high levels
of imperfectly-predictable seasonality-driven demand.
Almost all of the major consumption peaks come in
January—the prime heating season. Almost all of the
minor consumption peaks come in July—the prime
cooling season.
Two additional items punctuate the seasonality of
demand (consumption). First, the much wider swings
in consumption relative to production imply that natural
gas storage plays an important role in the logistics of the
physical market for natural gas. Storage acts as a mecha-
nism to buffer against unexpected demand, but storage
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Chart 20
Trend in U.S. Natural Gas Consumption and Production
Source: U.S. Energy Information Administration
30
inventory levels infuence the supply and demand condi-
tions perceived by market participants, so these storage
conditions have an infuence on price. Second, random
weather events often punctuate the more predictable
patterns of seasonal cyclicality on both the consump-
tion and production side of the market. For example, a
cold spell in late spring can create a surge in demand or
a storm in the Gulf of Mexico can temporarily disrupt
supply. Either event would put upward pressure on
natural gas prices in a manner that might deviate from
contemporaneous oil price movements.
The preponderance of current evidence suggests that
natural gas prices adjust to oil prices. The economics
related to fuel substitution, even though such substitu-
tion operates on a continuum of end-user choices, cre-
ates a relatively stable long-run pattern of co-movement
between oil prices and natural gas prices. Yet, many
subtleties and complexities in the market for natural gas
can generate wide divergence in a short-run context.
36
The strong break in the oil-natural gas price-link shown
in Chart 18 may also have a shorter-run interpretation—
although one different in character from a weather event
or storage imbalance. This report has marked the break
as 2010; other researchers have argued for 2006. Chart
19 provides some support for the early date. Note the
trend of increasing production relative to consumption
beginning about 2006. This date is consistent with the
increasing momentum behind shale gas production—
and other horizontal drilling projects.
Chart 20 provides a more vivid year-over-year illustra-
tion of the trends shown in Chart 19. Gas production
has clearly surged relative to consumption. The surge in
supply offers a clear explanation for the declining trend
in natural gas prices, in absolute terms and relative to
oil prices.
Such price collapses have occurred in past oil or gas
booms—and they are not sustainable. Dynamics on
both the demand side and the supply side will ultimately
drive natural gas prices back toward their historic, long-
run relationship with oil prices. First, on the supply side,
despite the popular excitement over the new technolo-
gies for extracting shale gas, producers have lost a lot
of money as the result of the price collapse for natural
gas (the core entrepreneurial risk framing this discus-
sion).
37
Consequently, gas producers will keep their gas
in the ground if they can and will postpone new gas
projects. Producers have turned their focus to using the
new horizontal-drilling technologies for producing oil.
The greater production of oil relative to natural gas will
help bring the two price series back into line with long-
run economics. Second, the low natural gas prices will
motivate an increase in the quantity demanded relative
to future supplies. The higher quantity demanded for
natural gas relative to refned petroleum fuels will help
bring the two price series back into line with long-run
economics.
Entrepreneurial Cost
Control through the
Business of Science and
Engineering
The National Science Foundation categorizes “oil and
gas extraction” among the most high-tech businesses
in the world.
38
As with many industrial pursuits, the
oil and gas industry has always fused together science,
engineering, and proft-seeking commerce. Each com-
ponent helps reinforce the other. The interactions drive
productivity: the quest to create ever-greater economic
value with ever-fewer resources used in the process. As a
general matter, given the price-taking posture of most oil
and gas producers, much of the entrepreneurial energy
must focus on cost control—with technology acting as
a key enabling tool.
36 In addition to Brown and Yücel, see: Peter R. Hartley, Kenneth B. Medlock III, and Jennifer E. Rosthal, “The Relationship of
Natural Gas to Oil Prices,” The Energy Journal, Vol. 29, No. 3, 2008; and David J. Ramberg and John E. Parsons, “The Weak Ties
Between Natural Gas and Oil Prices,” Center for Energy and Environmental Policy Research, Massachusetts Institute of Technol-
ogy, November 2010.
37 As Rex Tillerson, Chairman and CEO of Exxon-Mobil, said in June 2012: “We are all losing our shirts today.” http://www.
cfr.org/united-states/new-north-american-energy-paradigm-reshaping-future/p28630; also see: http://www.zerohedge.com/
contributed/2012-06-04/capital-destruction-natural-gas
38 Science and Engineering Indicators, Table 8-48. http://www.nsf.gov/statistics/seind08/tables.htm.
31
The geological science related to oil and gas is a fascinat-
ing subject that is beyond the scope of this report, except
to the extent one understands the enormous challenge
and cost associated with fnding commercially productive
reservoirs. Oil and gas result as a by-product of organic
and geologic processes. The creation of (conventional)
pools of oil and gas followed from a sequence of random
events that generate the necessary and suffcient condi-
tions. Research shows that about 2 percent of organic
matter dispersed in permeable rocks becomes petroleum.
About one-quarter of such matter will accumulate in a
reservoir that has commercial potential.
39
Convention-
ally (prior to advances in horizontal drilling), oil and gas
explorers had to fnd the places under the earth in which
rock formations trapped oil and gas in economically
“suffcient” quantities that fowed at “satisfactory” rates.
Undertaking the expense of drilling a well presents the
only way to confrm these conditions. Consequently,
discovering ways to minimize dry holes and maximize
the information derived from every well drilled motivated
the innovation process.
THE TECHNOLOGY OF THE UPSTREAM SECTOR
Chart 21 summarizes the annual production history of
oil and gas in Kansas, annotated by the dates of key
technological advances in rough approximation to when
Kansas producers began to apply them. Exploration and
technological advancement move through time together.
Recall from Chart 1 that Kansas producers, since the
1930s, drilled hundreds of oil and gas wells each year.
Consequently, the patterns of annual production do not
always show a stark reaction to the introduction of new
technologies. The process is symbiotic and evolutionary.
A chronology of key events in discovery, science, and
technological innovation follows:
40
39 Forest Grey, Petroleum Production for the Non-technical Person (Tulsa: PennWell Publishing Co., 1986), p. 27
40 The chronology draws liberally from: Daniel F. Merriam, “Advances in the Science and Technology of Finding and Producing Oil
in Kansas,” Oil-Industry History, Vol. 7, No. 1, 2006, pp. 29-46.
0
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Oil Producton Gas Producton
Rotary drilling
Seismic analysis
Core drilling
Wireline logging
Acidizing
Water ?ooding
3-D Sesimic
Tertary recovery
Relatonal databases
Hydro-fracking
Micro-seismics
Chart 21
Annual Production of Oil and Gas in Kansas, 1890-2011
Source: Kansas Geological Survey
32
1890—Nitroglycerin for well stimulation:
Early wells often needed stimulation to fow better. The
art of “shooting” a well involved using explosives to
stimulate the well. Shooters often picked nitroglycerin-
powered “torpedoes” to do the job.
1913—Surface structural mapping:
These maps resemble contour maps of the surface and
the boundary lines of important subsurface geological
features that give hints about where oil or gas might
reside.
1920s—Introduction of rotary drilling in Kansas:
Early drilling techniques (called cable-tool drilling) used
something like a heavy chisel on the end of a line. Rais-
ing and dropping the chisel-like drill bit smashed the rock
layers. The drilling crew had to periodically use another
string tool called a bailer to remove the smashed bits.
Certain situations may still call for this process.
The concept of rotary drills had existed for centuries.
An experiment with a rotary drill played a central role in
drilling the nation’s frst true gusher in 1901—the famous
well in Texas known as Spindletop. Rotary drills, though
more expensive to operate, can drill holes many times
faster than cable-tool drills. The circulating mud used
in the process also helps better control the integrity of
the well.
1923—Single-point seismic exploration and core
drilling:
A monument outside the Belle Isle Library in Oklahoma
City notes that in 1921 scientists in Oklahoma City
“confrmed the validity of the refection seismograph
method of prospecting for oil.” Originally, seismologists
set off a strategically-placed blast in a single location and
recorded with seismographs the vibrations that returned
from the subsurface. Since different subsurface strata
had different “echoes,” geologists could study the images
to identify structures in which oil or gas may accumulate.
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Chart 22
Percentage of Kansas Wells Drilled by Type, 1910-2011
Source: Kansas Geological Survey
33
(Eventually, the technique evolved to collect over a hori-
zontal distance the data necessary to generate vertical
cross-section (2D) “pictures” of the subsurface.)
Core drilling uses specialized drill bits to extract samples
of the rock in a well. Geologists inspect the rock for
signs of hydrocarbons. They also use the cores to help
“map” the subsurface geology.
1930s—Wireline logging and acidizing:
Wireline logging refers to the lowering of measurement
instruments down the wellbore. The primary aim of
logging is to assess the characteristics of a well in prog-
ress. Certain measurements can help provide valuable
information about the viability of a well. The sooner
such information becomes known, the better from an
economic perspective.
Acidizing injects acids into the well to make certain
rock formations more permeable to improve the fow
of hydrocarbons.
1935—Secondary recovery and water fooding:
Secondary recovery via water fooding is a method to
extract additional hydrocarbons from a reservoir once
its “natural” production stops. Water is injected into
the reservoir from strategically placed wells. Properly
executed, the water will fush additional hydrocarbons
from the rock.
1950—Micro-seismics and hydraulic fracking:
Micro-seismic was devised as a means to locate the drill
bit in real time by using seismic waves generated by
the friction between the bit and the rock or sand being
drilled. This information aided the drilling process and
helped advance innovations related to directional drilling
and 3-dimensional imaging (especially in the context of
evaluating and controlling the fracture patterns in con-
nection with modern fracking techniques).
Hydraulic fracking pumps fuid and sand mixtures into
wells to crack the rock formations as a way to help
improve the fow of hydrocarbons into the wellbore.
The frst test of this method took place in the Hugoton
gas feld in Grant County, Kansas in 1947. The maturity
of the technique is partly responsible for the growth of
gas production that followed the introduction of this
technology.
Exhibit 3
Tertiary Oil Recovery
Source: http://www.co2storagesolutions.com/
34
1990s—3-D seismic enhanced (tertiary) oil recovery,
integrated petroleum databases, directional drilling,
modern hydraulic fracking:
Several technologies began to mature by the 1990s in a
mutually reinforcing way. Kansas producers began to
make a more determined use of them at about this time.
Beginning in the 1980s, 3-D seismic images improved on
the 2-D techniques.
41
3-D images provide far more detail
about the structure of the subsurface, which allows for
more informed drilling decisions. As a 2003 Kansas-ori-
ented study stated: “The estimated commercial success
rate for wells drilled with 3-D seismic is 70%, compared
to an average success rate of approximately 30%-35%
for wildcat wells drilled in Kansas over the past 3 years.
3-D seismic has been particularly useful for delineating
small structural highs and narrow channels that can be
signifcant drilling targets, but cannot be identifed with
well-control alone or even using 2-D seismic data.”
42
Chart 22, which is an alternative way to view the infor-
mation presented in Chart 1, documents that Kansas
producers have had increasing success rates with their
drilling activity since the mid-1960s. The implementation
of 3-D seismic reinforced the trend.
Tertiary oil recovery with CO
2
began as experiments in
the 1970s. Tertiary oil recovery has the same goal and
techniques as secondary recovery—except that gases
(like CO
2
or steam), chemicals, or microbes become an
added stimulant injected into the reservoir. The addi-
tional stimulants help lower the viscosity of the oil so
that it fows better. CO
2
does this job well.
(See Exhibit
3.) The development of 4D seismic has begun to com-
pliment tertiary recovery in mature felds. The fourth
dimension is time, which allows geologists to monitor
the fow patterns of specifc reservoirs so as to better
stimulate them.
43
Beginning in the 1980s, producers began to increase their
use of directional (horizontal) drilling techniques. The
concept and technology for directional drilling dated
back decades, but it did not become economic until
41 http://www.rri-seismic.com/Frame Pages/Tech Pages/Seismic/seismic.htm
42 Susan Nissen, et al. “3-D Seismic Applications by Independent Operators in Kansas,” Petroleum Technology Transfer Council,
January 2003, p. 1.
43 Ayyoub E. Heris, et al., “Study Integrates Flow Simulation, 4D,” The American Oil & Gas Reporter, July 25, 2012.
Exhibit 4
Key Elements of Modern Drilling Technology
Source: http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/ntrlgs/
prmrndrstndngshlgs2009/prmrndrstndngshlgs2009-eng.html
35
the 1980s. Directional drilling, which often produces a
smaller environmental footprint, may have several opera-
tional and economic advantages because it can mean
better production rates from fewer wells drilled. Kansas
producers have drilled, on average, a few horizontal wells
each year since 1990.
The advancement of computing technology has allowed
for improvement in all of the above technologies. In
Kansas, the advancement of computing technology has
also allowed the Kansas Geological Survey to develop
integrated databases for use by the independent produc-
ers of Kansas. The Robert F. Walters Digital Geological
Library, which resides in Wichita and is managed by the
Kansas Geological Society, makes available a vast reserve
of data related to oil and gas wells. The improved access
to information allows for better decision making.
Exhibit 4 allows for the visualization of three key ele-
ments of modern drilling processes that have made
“unconventional” sources of oil and gas commercially
viable. As discussed above, the various technologies had
been under development for decades. Their confuence
in the context of producing commercially viable shale
gas (and later, shale oil) dates to 1997 when Texas-based
Mitchell Energy (after years of research and develop-
ment partnerships with the Department of Energy, the
Gas Research Institute, and other private frms) drilled
a successful horizontal well in the Barnett Shale in the
vicinity of Fort Worth, Texas.
The top image in Exhibit 4 illustrates the fracking pro-
cess in both a vertical and a horizontal well. Directional-
drilling technologies enable the drilling of horizontal
wells. Some oil and gas rich geologic structures have a
vertical thickness of only a few dozen feet—but they can
cover a vast geographic area. Horizontal- drilling tech-
niques allow producers to tap into that vastness. Notice
the different colored zones in the image. Each one of
these zones may represent an isolated fracking process:
multi-stage fracking. Perfecting the multi-stage process
as a horizontal well bores ever deeper into a formation
represents one of the many advancements that enables
the success of the modern techniques.
The middle image in Exhibit 4 shows how a producer
might maximize production from a single well site by
strategically spacing many horizontal wellbores. Each
wellbore might be fracked.
The bottom image of Exhibit 4 shows a 3-D microseis-
mic image of a fracked horizontal well. This technology
allows for frack mapping. A seismic instrument is low-
ered into the wellbore, and the resulting seismic feedback
allows producers to see patterns of fractures in the rock
formation. Each color represents a different level of the
multi-stage fracking operations. This type of mapping
technology made the teams at Devon Energy (which had
acquired in 2002 Mitchell Energy, the pioneer in shale-
related horizontal fracking) realize the extent to which
horizontal drilling combined with multi-stage fracking
of each wellbore made all the difference for success.
44
THE BUSINESS OF THE UPSTREAM SECTOR
Exhibit 5 presents a schematic of the upstream oil and
gas sector. The front-end of the process involves an
iterative process of business negotiation and scientifc
investigation—an iterative process that (1) endeavors
to defne the economic prospects of a potential oil or
gas property and (2) creates a mutually-advantageous
contractual arrangement with regard to the consenting
parties who will share the actual costs and benefts related
to the prospect. Once the parties involved have made
a contract, the engineering processes related to drilling
proceeds. Of course, the engineering process is itself
an interlocking network of business arrangements. As
two industry experts have noted: “The world of petro-
leum is a world of contractors and subcontractors.”
45
Specialization abounds.
As detailed later in the report, on average, over the past
decade, Kansas has employed almost 14,000 private-
sector people in the upstream activities depicted in
Exhibit 5. Thousands of those counted represent single-
person businesses. Of the roughly 1,000 businesses with
employees, the average job count per business equals
eight. A large number of small, specialist enterprises
comprise the upstream business ecosystem in Kansas.
44 http://thebreakthrough.org/blog/2011/12/interview_with_dan_steward_for.shtml
45 Bill D. Berger and Kenneth E. Anderson, Modern Petroleum: A Basic Primer of the Industry, 3
rd
Edition (Tulsa: PennWell Publish-
ing Company, 1992), p. 118.
36
and extraction process. The owner(s) of the mineral
rights must cooperate in the extraction process. The
“landman” employed by an oil or gas company has the
duty to determine the ownership rights and manage the
negotiations among the various owners. With many
legal interests in play, the structure of negotiations can
become complicated.
Legal counselors to landowners usually advise them to
put legal agreements in place before allowing any type
of scientifc investigation to take place on their property.
Typically, in Kansas, landowners will secure a formal
lease contract before granting access to their land. The
lease gives the lessee the right to explore. The payments
made to the lessor under the contract, in part, compen-
sate them for any damage that might occur on the land
during the exploration process.
Geology and Geophysics
Geoscientists study subsurface materials, structures, and
processes using drill cuttings, gravity, magnetic, electrical,
and seismic methods. In brief, they try to scientifcally
determine where to drill and evaluate the volumes of
hydrocarbons that may exist in a particular drilling zone.
Economics
Reservoir engineers use the scientific information
compiled and analyzed by the geoscientists to develop
economic estimates related to drilling costs and projected
payoffs based on the estimated volume of recoverable oil
or gas. They also work with other experts to continually
assess and improve the cost-beneft equations related to
alternative drilling plans or methods. In brief, reservoir
engineers help make the decision about whether or not
to undertake the cost of drilling a well.
Legal & Contractual
Once the evaluation process has advanced far enough for
the relevant parties to make a decision to drill a well, legal
negotiations must take place related to how the surface
rights owner will be accommodated and compensated
during the production process and the owner(s) of the
mineral rights, via a lease contract, will share in whatever
economic gain results from the well. The mineral lease
has several components:
46
Exhibit 5
A Sketch of the Upstream Oil & Gas Industry
Landowner
In the United States, the landowner(s) holds a prominent
place because he or she has the legal property rights to
the oil and gas. However, the legal rights can be split
between (a) the surface rights to use of the land and
(b) the mineral rights to use of the land. Often the
same person or legal entity owns both rights. Each set
of rights may also be split in fractional shares among
many different persons or legal entities. The owner(s)
of the surface rights must cooperate in the exploration
37
• Bonus payment—an up-front payment for sign-
ing the lease, often negotiated as a fxed dollar
per acre.
• Royalties—a share of the proceeds from pro-
ducing and selling the oil or natural gas.
• Time limits related to how long a lessee can
explore and drill, along with specifc defnitions
related to exploration, drilling, and quantities
produced.
• Directives related to the protection and proper
stewardship of the minerals.
• Penalty clauses.
• Pooling clauses that allow oil and gas com-
panies to form partnership agreements with
other leaseholders in a geographic area for the
purpose of improving the cost-effectiveness
of operations.
• Clauses related to operating restrictions and
satisfactory performance.
Oil and gas companies that initiate a project (by acquir-
ing a lease) often try to spread their risk by selling
fractional interests to other investors. The contractual
arrangements make explicit how the parties will share
the costs and revenues. Royalty interests differ from
mineral interests.
SITE PREPARATION, WELL DRILLING, AND WELL
COMPLETION
As already mentioned, the upstream oil and gas business
represents an interlocking network of contractors and
subcontractors. All of the high-tech elements related
to oil and gas extraction represent professional special-
ties. Entire businesses may specialize in one part of the
intricate overall process.
Chart 23 shows that, on average, since 1997, Kansas has
more than 60 drilling rigs operating. Since 2004, the
0
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U.S. (untl Dec. 2011) Kansas (untl June 2012)
Chart 23
U.S. and Kansas Count of Active Drilling Rigs
Source: Independent Oil and Gas Service, Inc. (Red Top News); U.S. count from Baker-Hughes
46 Berger and Anderson, Chp. 4.
38
time of a general escalation in oil prices, the average has
exceeded 85 rigs per month. The trend in Kansas rigs in
operation matches closely the U.S. trend. As discussed in
detail above, global oil markets have a tight integration;
all producers respond to the same set of price signals.
The list below provides a cursory overview of the
semi-skilled and highly-skilled people involved with
drilling rigs, well completions, and on-going produc-
tion. According to data compiled by the Independent
Petroleum Association of America, among the produc-
ing states, Kansas typically ranks third or fourth in oil
wells drilled and seventh or eighth in natural gas wells
drilled. (See Chart 8.) All of the drilling activity has
established a pool of talent in Kansas that is broad and
deep. From a producer’s perspective, all operating costs
associated with employing these specialized people (and
well operations in general) are signifcant—and present
elements of entrepreneurial risk.
Petroleum engineers: Devise methods to improve oil
and gas extraction and production.
Rig operators: Set up or operate a variety of drills and
pumps to circulate mud through a drill hole.
Fluid engineers: Manage appropriate drilling fuid
specifcations for a drilling operation.
Wireline operators: Use of cabling technology to lower
equipment or measurement devices into a well.
Well loggers: Detailed recordkeeping (a well log) of the
geologic formations penetrated by a borehole.
Casing: Placement of pipe into a recently drilled sec-
tion of a borehole.
Cementing: Securing casing pipe with advanced
cementing techniques. Note that casing and cementing
protocols play an integral role in the structure of the
well—and work simultaneously to protect underground
water supplies, as shown in Exhibit 6. Not every well
follows each of the cementing steps shown in Exhibit
6—especially in Kansas. Conductor casing is used in a
low percentage of Kansas wells. Kansas producers also
rarely use intermediate casing. In Kansas, surface casing
is typically set to the depth necessary to protect fresh
water; on productive wells, production casing is set to the
Exhibit 6
Drill Casing and Cementing
well’s total depth and then cemented at the bottom of the
hole to case off zones that have productive potential and
at the top of the hole to protect “usable water” (water
that is not fresh enough to be used without treatment).
Perforating: Techniques used to create a hole in the
casing through the cement and into the rock forma-
tion to allow (and enhance) oil and gas to fow into the
completed well.
Stimulation: Specialized techniques used to improve
well fow or enhance oil and gas recovery, such as acidiz-
ing, fracking, swabbing, hot oiling, snubbing, and coil
tubing.
Acidizing: The use of hot hydrochloric acid to remove
substance build-up—like limestone, dolomite and calcite
cement—that can impede the fow of a well.
Fracking: The propagation of fractures in a rock layer
that results from injecting highly-pressurized fuid mix-
tures into a well.
39
Swabbing: Removal of liquids that were instrumental
to the drilling process but must be removed for proper
well operation. Specialists place a rubber plunge down
the well bore. The swab is then pulled back up towards
the top of the well bore. As the swab moves up the well
the pressure below it is reduced and liquids are sucked
out behind it.
Hot Oiling: Circulation of heated fuid, typically oil, to
dissolve or dislodge paraffn deposits from the produc-
tion tubing. Such deposits tend to occur where a large
variation in temperature exists across the producing
system.
Snubbing: Also known as hydraulic workover, this
procedure involves forcing a string of pipe into the well
against wellbore pressure to perform the required tasks.
The rigup is larger than for coiled tubing and the pipe
more rigid.
Coil Tubing: Coiled tubing is used when producers
desire to pump liquids directly to the bottom of the well,
such as in a circulating operation or a chemical wash.
It can also be used for tasks normally done by wireline
if the deviation in the well is too severe for gravity to
lower the toolstring and circumstances prevent the use
of a wireline tractor.
Pumper: A pumper gauges (measures) the tanks daily,
performs routine maintenance, and reports any problems
that may arise to his superintendent.
Salt Water Disposal: Salt water produced by a well is
frequently hauled to a distant disposal well if a lease does
not have its own disposal facilities—or is not connected
to a nearby disposal well.
Miscellaneous Services: If a well doesn’t produce gas,
it is either served by a propane supplier or it is tied in
to an electrical system. Repairs to the engine or motor
powering the pumping unit periodically occur. Repairs
also occur to the pumping unit and tank battery. Wells
need to have their rods and tubing pulled periodically
to repair parts in the rod string or leaks in the tubing.
Plugging Wells: When a well’s production has declined
to the point where its production revenues will no longer
cover its operating costs, the well is said to have reached
its economic limit, even if the well may still have recover-
able oil or gas. At this point, a producer will most likely
choose to plug the well, remove the equipment, and
forfeit the leasehold interest. Any operator of a well
is ultimately responsible for plugging it. The Kansas
Corporation Commission will look to the most recent
operator frst; only when it cannot identify a potentially
responsible party will it designate a well as an “orphan
well” and plug it at the expense of the state government.
The fnancing for state-sponsored plugging of orphan
wells comes from two funds maintained by the Kansas
Corporation Commission. The primary contribution to
those funds, in turn, comes from the oil and gas industry
through (1) the conservation fee (production tax) and (2)
the fnancial assurance payments made when operators
renew their licenses. Additional funds come from the
Kansas Water Plan and from the state share of oil and
gas royalties on Federal lands. Kansas law also provides
for a $400,000 annual transfer from the State General
Fund (about 25 percent of the total). However, State
General Fund transfers have not occurred in recent
years.
47
HEALTH, SAFETY, AND ENVIRONMENTAL OVERSIGHT
The Kansas Corporation Commission (Conservation
Division) is the primary government agency charged with
regulating oil and gas activities in Kansas. The functions
of the Commission have grown signifcantly over time.
In the earliest days of the Kansas oil and gas industry,
before producers and consumers understood how to
steward the oil and gas resources properly, the Commis-
sion protected correlative rights (the rights to oil and gas
reserves underneath adjacent properties with different
owners) and promulgated rules to help prevent waste.
This focus resulted in well-spacing orders to protect
the rights of offsetting landowners and to prevent over
drilling. Another remedy involved rules related to “pro-
duction allowables,” or limits on the rate of production
from a given well.
In one way or another, the Kansas Corporation Com-
mission (in conjunction with federal regulators like the
Environmental Protection Agency and the Department
47 See K.S.A 55-192, K.S.A 55-193 and FY 2013 Governor’s Budget Report—Volume 1, p. 77.
40
of Labor’s Occupational Safety and Health Administra-
tion), oversees almost all of the steps and processes
related to producing oil and gas, as depicted in Exhibit
5. The Conservation Division of the Kansas Corpo-
ration Commission is staffed by professionals with
backgrounds in geology and law, and many of the pro-
fessionals have industry experience. The staff maintains
an open dialogue with industry through the Oil & Gas
Advisory Committee, which represents industry, land-
owners, and other interested parties. The Conservation
Division has a history of professionalism and of timely
responses to flings, which serve to adequately regulate
the industry without undue cost or delay. The Kansas
Corporation Commission has formal rules, procedures,
and (as appropriate) penalties related to:
• Notice of intention to drill.
• Classifcation of wells.
• Procedures for determining the location of
wells using global positioning system.
• Application for well spacing.
• New pool applications.
• Operator or contractor licenses.
• Assignment of allowables.
• Preservation of well samples, cores, and logs.
• Unlawful production.
• Prevention of waste, protection of correla-
tive rights, and prevention of discrimination
between pools.
• Well construction requirements.
• Well casing and cementing.
• Mechanical integrity requirements.
• Mechanical integrity testing.
• Tests of wells.
• Shut-off tests.
• Completion reports.
• Drilling through gas storage formations.
• Drilling through CO2 storage facility or CO2
enhanced oil recovery reservoirs.
• Dual or multiple-completed wells.
• Surface commingling of production.
• Vacuum and high volume pumps applications.
• Transfer of operator responsibility.
• Pollution prevention.
• Venting or faring of gas.
• Sensitive groundwater areas.
• Spill notifcation and clean-up.
• Disposal of hazardous materials.
• Leak detector inspections and testing.
• Reporting of leaks, potential leaks, or loss of
containment.
• Notice of intention to abandon a well.
• Temporarily abandoned wells.
• Plugging methods and procedures.
• Tank and truck identifcation.
• Documentation required for transportation
and storage.
• Storage facility requirements.
• Storage facility monitoring and reporting.
• Safety inspection and annual review of safety
plans.
• Temporary abandonment of a storage facility.
• Application for decommissioning and abandon-
ment of storage facility.
The growing use—and public awareness—of hydrau-
lic fracturing has raised public concerns related to its
potential to degrade water supplies. To protect fresh and
usable groundwater, the Kansas Corporation Commis-
sion has promulgated regulations dealing with the casing
of wells, cementing that casing, the use of surface pits
and the plugging of wells. Any spills of oil or salt water
are required to be reported to the Commission which
41
will provide guidance for cleanup activities. As most oil
and gas wells produce a certain amount of salt water
waste, the Commission has rules for its safe disposal into
non-usable water bearing geological formations and for
the testing of the mechanical integrity of the salt water
disposal wells. The casing and cementing rules serve to
protect water resources from both the disposal of waste
water and from hydraulic fracturing. Each operator must
be licensed by the Commission and is subject to fne or
revocation of license for acts of non-compliance.
Assessing the Future: How
“Unconventional” Oil and
Gas Plays May Contribute to
the Kansas Economy
The defnition of “unconventional” oil or gas systems
typically relates to their economics.
48
“Unconventional”
oil and gas plays cost more to develop than “conven-
tional” plays. That general, but not necessarily universal,
defnition explains why hydrocarbons trapped in shale
or coalbeds often qualify as unconventional oil or gas
resources. Historically, producers faced much higher
extraction costs for these resources (if they could indeed
actually extract them) than they did for oil or gas trapped
in, say, sandstone. Scientifc and technological advance-
ment may have lowered the production costs, but the
defnitional classifcations remain.
THE MISSISSIPPIAN LIME PLAY
The Mississippian Lime play in south central Kansas (and
perhaps much of western Kansas) fts into the “uncon-
ventional” category primarily because the horizontal-
drilling techniques being employed are the same ones
used to extract oil and gas from shale. Kansas producers
have extracted oil and gas from the Mississippian Lime
formation for decades using “conventional” techniques
(like basic vertical well drilling).
Nevertheless, because of the new techniques, the Mis-
sissippian Lime may yield a substantial amount of oil
and gas that more conventional techniques (seemingly)
could not access. That makes the play sit comfortably in
this report’s model of an industry defned by enduring
high-tech entrepreneurship.
The portfolio of horizontal-drilling technologies
discussed above resulted from the entrepreneurially
energies of a collection of Mid-Continent frms. The
earliest efforts of these entrepreneurs beneftted from
a shale gas research and development project in the
New England area initiated in the mid-1970s the then
newly-created Department of Energy. But the Mid-
Continent frms (with the early aid of a few risk-sharing
grants and technological assistance from government
agencies) conducted the trial-and-error work required to
make unconventional oil and gas sources commercially
viable. A 1997 well drilled by Mitchell Energy into the
Barnett Shale underneath the area of Fort Worth, Texas
typically marks the breakthrough point. Advances and
refnements continued thereafter.
The smaller, independent companies entrepreneurially
pursued the unconventional oil and gas sources for the
same primary economic reason smaller, independent
companies dominate Kansas production: The projected
profts on specifc projects do not rise to the dollar levels
required by larger companies.
Harvard researcher Clayton Christensen established this
general point in the work that led to his iconic book, The
Innovator’s Dilemma. He has summarized the point this
way: “One of the bittersweet results of success is that
as companies become large, they lose sight of small,
emerging markets.”
49
The major oil companies had the human and fnancial
capital to pursue and develop the disruptive technolo-
gies so-far discussed, but they did not have a compelling
fnancial incentive to pay attention. Most of the major
oil companies had their focus on fnding large, con-
ventional sources of oil and gas outside of the United
States (except for the Gulf of Mexico).
50
Rex Tillerson,
Chairman and CEO of Exxon-Mobil, speaking before
an audience associated with the Council on Foreign
48 B.E. Law and J.B. Curtis, “Introduction to Unconventional Petroleum Systems,” AAGP Bulletin, Vol. 86, No. 11, November 2002,
pp. 1851-1852.
49 Clayton M. Christensen and Michael Overdorf, “Meeting the Challenge of Disruptive Change,” Harvard Business Review, March-
April 2000, p. 70.
42
Relations, recently said: “And I would be less than honest
if I were to say to you, and we saw it all coming, because
we did not, quite frankly. We did recognize the potential
of the shale resources in North America. We recognized
there were technology solutions to a portion of that. We
grossly underestimated the capacity of both the rocks,
the capacity of the technology to release the hydrocar-
bon, natural gas from the shale gas and now oil from
tight oil rocks. We underestimated just how effective that
technology was going to be, and we also underestimated
how rapidly the deployment of that technology would
occur -- again, all in response to fairly high prices.”
51
With the technology and production potential proven,
Exxon-Mobil addressed its lack of foresight by acquiring
XTO Energy in 2010, in a deal valued at $41 billion.
52
The economic potential made possible by the new
technologies has brought a major oil company back to
Kansas. The Shell Oil Company recently purchased
large tracts of leased acreage in Kansas related to the
Mississippian Lime formation. Prior to this investment,
records from the Kansas Geological Survey indicate
that Shell Oil last completed a well in Kansas in 1984
(with most activity before that pre-dating 1950). Two
Oklahoma-based companies, Sandridge Energy and
Chesapeake Energy, have also leased large amounts of
acreage related to the Mississippian Lime play.
Map 2 indicates the approximate geography of the
Mississippian Lime (which extends down two-counties
deep into Oklahoma) and the Kansas counties that have
attracted the most intent-to-drill permits for horizontal
wells. Intent-to-drill represents a permitting process
not a guarantee to drill a well. Producers, as a matter of
operational planning, often register an intent-to-drill that
does not ultimately materialize as an actual well drilled.
The left-hand number shown in the select counties on
Map 2 indicates the count of intent-to-drill permits; the
right-hand number indicates the count of well comple-
tions. The counts represent permit and drilling activity
50 Verleger, “The Amazing Tale of U.S. Energy Independence,” p. 54.
51 http://www.cfr.org/united-states/new-north-american-energy-paradigm-reshaping-future/p28630
52 http://news.exxonmobil.com/press-release/exxon-mobil-corporation-and-xto-energy-inc-announce-agreement
Allen
Anderson
Atchison
Barton
Bourbon
Brown
Butler
Chase
Chautauqua
Cherokee
Clay
Cloud
Coffey
Crawford
Decatur
Dickinson
Doniphan
Douglas
Elk
Ellis
Ellsworth
Franklin
Geary
Graham
Grant
Greeley
Greenwood
Hamilton
Harvey
Jackson
Jefferson
Jewell
Johnson
Kearny
Labette
Leavenworth
Lincoln
Linn
Lyon
Marion
Marshall
Mcpherson
Miami
Mitchell
Montgomery
Morris
Morton
Nemaha
Neosho
Norton
Osage
Osborne
Ottawa
Phillips
Pottawatomie
Republic
Rice
Riley
Rooks
Russell
Saline
Seward
Shawnee
Sheridan
Smith
Stafford
Stanton
Stevens
Wabaunsee
Washington
Wilson
Woodson
Wyandotte
Barber
Cheyenne
Clark
Comanche
Cowley
Edwards
Finney
Ford
Gove
Gray
Harper
Haskell
Hodgeman
Kingman Kiowa
Lane
Logan
Meade
Ness
Pawnee
Pratt
Rawlins
Reno
Rush
Scott
Sedgwick
Sherman
Sumner
Thomas
Trego Wallace
Wichita
12/2
9/0
53/15 38/19 66/29 9/4
Map 2
Approximate Area of Interest Related to the Mississippian Lime Formation and Count of Horizontal Well
Permits vs. Wells Drilled (2010 through July 2012) in the Top-6 Counties
Source: Sandridge Energy, Public Presentation; Kansas Geological Survey
43
that took place from 2010 through July 2012. In that
time frame, Barber County (at 50 percent) experienced
the highest conversion rate from intent-to-drill to well-
drilled. Only time will tell if the conversion rates increase
from those reported on the map.
To further clarify, the fgures on Map 2 represent hori-
zontal wells only. The intent-to-drill horizontal versus
vertical wells is a relevant distinction separating the
Mississippian Lime play from the regular patterns of
exploration and production. Map 2 shows the number
of horizontal well permits from 2010 through July 2012
for the top-6 counties only: 187 out of a total of 260.
Most of the other permits, but not all, specifed coun-
ties in the Mississippian Lime zone on the map. Over
the same time period, however, the Kansas Corporation
Commission issued 20,958 intent-to-drill permits that did
not have a horizontal specifcation. The Mississippian
Lime play has stimulated interest and received attention
form the news media, but the independent producers of
Kansas continue to explore and drill in 92 of the state’s
105 counties. (Table B5 in Appendix B shows that inde-
pendent oil and gas producers, over the state’s history
have drilled 97 percent of the wells, produced 93 percent
of the oil, and produced 63 percent of the natural gas.)
Beginning in 2012, blog posts appeared comparing
the Mississippian play in Oklahoma and Kansas to the
Bakken shale play in North Dakota.
53
Such compari-
sons should consider several different perspectives and
caveats. The comparisons have two fundamental ele-
ments: (1) the potential growth of oil and gas related
jobs supported by drilling and production and (2) the
potential size of recoverable oil and gas reserves. The
potential drilling-and-production-related job growth, in
turn, has implications for the transportation and housing
infrastructure required to accommodate such growth.
To put the infrastructure issue in perspective, Chart 24
illustrates upstream (exploration, drilling, and drilling-
support services) job growth in select counties that have
experienced recent oil or gas “booms.” Chart 25 helps
provide further perspective by illustrating upstream jobs
0
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Chart 24
Quarterly Upstream Job Count in Select “Boom” Counties
Source: U.S. Bureau of Labor Statistics
53 See, for example: http://seekingalpha.com/article/322155-investing-in-the-mississippi-lime-is-it-the-new-bakken
44
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Chart 25
Upstream Jobs as a Share of Total Jobs (implied by Chart 1)
0% 0%
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Upstream Share of Total Upstream Share of Total Upstream Jobs Upstream Jobs Total Jobs Total Jobs
Chart 26
Quarterly Change of Upstream and Total Jobs (along with Upstream Job Share) in Williams County,
North Dakota
Source: U.S. Bureau of Labor Statistics
45
as a share of total jobs. Contrast Weld County, Colorado
with the other counties. Weld County had the upstream
job count and job growth of many of the other boom
counties, but the share of upstream jobs was much
smaller. Weld County hosts several sizable cities (Greeley
has a population of about 92,000) and is within close
driving proximity from the Denver metro area. This
type of context matters. The more remote counties
can expect to exhibit much more severe infrastructure
strain as part of the growth process. Proximity to larger
population centers can help ameliorate the strain—a
relevant point in the context of the Kansas portion of
the Mississippian Lime, since Oklahoma City, Tulsa, and
Wichita have close proximity to the current target coun-
ties shown on Map 2.
Notice that both the job counts and the job growth
illustrated in Chart 24 number in the thousands. Wil-
liams County, North Dakota (which has received most of
the recent news media attention) represents an extreme
case. It has exhibited explosive growth. And it has
experience noteworthy infrastructure strains as a result.
From 1997 to 2012, Williams County experienced 300
percent growth in its count of total jobs; two thirds of
that growth took place from 2010 to 2012. At the begin-
ning of this growth phase, offcials estimated the need to
build homes for 23,000 new permanent residents—and
the utility infrastructure required to service those homes.
Before the boom, this area of North Dakota typically
experienced at most a few dozen housing starts per year.
54
Chart 26 illustrates the quarter-over-quarter progression
of the growth phenomenon in Williams County, North
Dakota. It also reveals some of the growth dynamics
related to upstream jobs and total jobs. The steady net
growth in upstream jobs eventually triggered enough
critical mass to support the growth of a large number
of other jobs. To put the Williams County growth
into context, consider that, on average, over the period
from 1998 to 2010, Kansas has supported about 7,000
upstream jobs. The upstream job growth in Williams
County represents the equivalent of the entire Kansas
upstream job base rapidly converging on a relatively
rural Kansas county like Dickenson County, Seward
County, or Sumner County. So far, no evidence indicates
that Kansas will experience job count numbers of this
magnitude.
The Mississippian Lime activity in Oklahoma offers per-
haps the best evidence for setting expectations in Kansas.
Essentially, nine counties in north central Oklahoma
encompass the Mississippian Lime formation. Table 5
reports the number of horizontal wells drilled in those
counties from 2009 through June of 2012. Note that
the Oklahoma counties registering the highest count
of well completions: Woods, Alfalfa, and Grant, are,
respectively, roughly contiguous to the Kansas counties
of Comanche, Barber, and Harper, the counties on Map
2 registering the most interest.
Table 5
Horizontal Wells Completed in Oklahoma
Mississippian Lime Counties
County 2009 2010 2011 2012*
Alfalfa 1 18 91 70
Gar?eld 2 3 12 5
Grant 0 2 58 42
Kay 1 4 6 4
Major 1 0 0 0
Noble 0 0 5 4
Pawnee 0 1 2 1
Payne 3 5 9 12
Woods 13 30 40 62
Total 21 63 223 200
*Through June of 2012
Source: Oklahoma Corporation Commission
Two companies dominate the production activity implied
by Table 5: Chesapeake Energy and Sandridge Energy.
These companies accounted for more than 98 percent
of the horizontal well completions in Alfalfa and Woods;
with Sandridge completing at least 70 percent of the
wells in Alfalfa and Chesapeake completing at least 75
percent of the wells in Woods. Sandridge accounted
for at least 85 percent of the wells completed in Grant
County.
The price of oil or gas drives drilling. Oil and gas prices
collapsed in 2008. Oil prices bottomed-out in 2009 and
began to escalate rapidly. Gas prices remained near post-
collapse levels. (See Chart 3.) The favorable trend in oil
prices helps explain the upward trend in number of wells
drilled shown in Table 5—and why a Sandridge executive
has made public statements suggesting that the company
54 Danny Boyd, “Oil Boom Creates Infrastructure Needs,” The American Oil and Gas Reporter, February 2011.
46
may drill as many as 200 wells in Kansas in 2013.
55
Of
course, as all veterans of the oil and gas industry know,
favorable price trends can quickly turn unfavorable.
THE POTENTIAL FOR INFRASTRUCTURE STRAINS IN
KANSAS
The drilling operations in the Mississippian Lime play
will likely put strains on infrastructure in rural Kansas.
In other states, the infrastructure strain from increased
horizontal drilling activity has come in two general
forms: truck traffc and housing for upstream workers.
The truck traffc is unavoidable and will be a function
of drilling requirements and the rate at which producers
drill wells. The issue of housing accommodations for
upstream workers carries more uncertainty; the Kansas
locations currently attracting interest from producers
with plans to drill horizontal wells are rural but not nec-
essarily desolate. Commuting from urban areas offers
options.
Truck traffc has placed a signifcant burden on the rural
roads in North Dakota and certain counties in Texas
(related to the Eagle Ford Shale). For example, in North
Dakota, each well requires approximately 1,000 truck
trips to the well and 1,000 truck trips from the well.
56
The well-drilling activity in Kansas could match those
truck numbers for several years. The Mississippian Lime
is much more shallow and easier to hydraulically fracture
than the Bakken Shale and Eagle Ford Shale. However,
the Mississippian Lime produces much more salt water
than the shale formations. In the case of shale, pro-
ducers truck water in; in the case of the Mississippian,
producers will likely truck water out—until they become
confdent enough with the particulars of the Mississip-
pian’s production potential to invest in water-related
pipeline or disposal-well infrastructure. (However, the
CEO of Sandridge Energy has made public statements
expressing that company’s intention to develop salt water
disposal systems ahead of the drilling program, and
thereby eliminate or mitigate the need for trucking salt
water: “The mystery of the play that was unlocked . .
55 Dan Voorhis, “Oil Exec: SandRidge Finding Increasing Success in Horizontal Drilling in Kansas,” Wichita Eagle, August 20, 1012.
http://www.kansas.com/2012/08/20/2456786/oil-exec-sandridge-fnding-increasing.html
56 Danny Boyd, “Oil Boom Creates Infrastructure Needs,” p. 2.
57 Dan Voorhis, “2012 May Reveal Future for Oil in Kansas, Wichita Eagle, March 5, 2012.
http://www.kansas.com/2012/02/24/2224606/2012-may-reveal-future-for-oil.html
. is that high enough oil prices and drilling a horizontal
well that can get enough volume can make money, can
have a rate of return. If you have the belief that you can
move 3,000 barrels of water a day and get 200 or 300
barrels of oil with it, and do that over a large area, you’d
be inclined to go ahead and spend the tens of millions
of dollars up front for a water disposal system.”
57
)
The outlook for the Mississippian Lime play remains
uncertain. Success in the Mississippian Lime could lead
to hundreds of horizontal wells being drilled each year.
But “success” is the operative word.
Disappointing exploration outcomes and shifting eco-
nomic conditions are an inherent part of the model of
high-tech entrepreneurship that characterizes the oil
and gas industry. The current explorations in Kansas
could disappoint with regard to recoverable oil and gas.
Alternatively, the economics of the Mississippian Lime
play could change—either in absolute terms (because
of, say, a collapse in prices) or in relative terms (because
of, say, new plays in other locations with better expected
investment returns). The economics matter somewhat
more in the Mississippian Lime context than in other
shale plays around the country because three compa-
nies hold most of the leases related to the Mississippian
Lime play; the turnover of activity related to alternative
resource-allocation decisions that these three leasehold-
ers might make could be much slower than in regions
with dozens of leaseholders and production companies
(like the Bakken or Eagle Ford Shale regions).
The “baseline” production scenario described below
assumes “success,” and defnes it in a particular way:
the average number of horizontal wells drilled per quarter
begins at 75 and grows to 300 over a 10-year period. If
all of that activity happened to take place in, say, two
counties instead of several counties, the road infra-
structure in the two counties could experience between
150,000 and 600,000 more truck trips than otherwise.
Even if the drilling activity becomes much more dis-
persed, certain road corridors could act as primary traffc
47
ways. (In the most optimistic scenario contemplated
below, the number of wells could increase by 114 percent
over the baseline scenario, implying between 320,000 and
1,280,000 more truck trips than otherwise.)
Insuffcient housing accommodations have placed stress
on municipal government resources in North Dakota
and Wyoming. First, upstream activity in both these
states required the creation of “man camps,” which can
lead to increased demand for local government services,
especially emergency responders related to health and
safety. Second, the relatively high wages paid to the
upstream workers can serve to bid up the price of hous-
ing, food, and other amenities—thereby increasing the
overall cost of living for long-time residents that may
not have the resources to bear it.
The demand for temporary housing will depend on many
factors. However, the “baseline” production scenario
discussed below contemplates 60 workers per well that
will require temporary housing accommodations. Com-
bined with the baseline assumptions about the (escalat-
ing) number of wells drilled per quarter, localities could
experience a demand to accommodate between 4,500
and 18,000 temporary workers per quarter. A change
to the scenario assumptions could potentially double
those numbers.
Based on Map 2, Barber, Comanche, and Harper Coun-
ties have attracted the most intent-to-drill applications.
Those three Kansas counties have a combined popula-
tion of about 12,800. That number is less than the
combined number of about 19,000 for the Oklahoma
counties of Alfalfa, Grant and Woods. The drilling activ-
ity represented in Table 5 indicates that the Oklahoma
counties have experience relevant for Kansans. The
workforce and infrastructure issues should share similar
characteristics.
The clear lesson learned from the experience of other
oil and gas boom localities is the importance of planning
and working collaboratively—among governments and
between governments and industry. The state of Kansas
has put in place the foundations of a planning process by
forming an Inter-Agency Working Group that includes
representatives from the Departments of Agriculture,
Transportation, Revenue and Health and Environment;
the Kansas Corporation Commission (KCC); the Kansas
Water Offce; the Attorney General’s Offce; and the
Kansas Housing Resources Corporation. The Group
has sent delegates on fact-fnding missions to North
Dakota and Mississippian-Lime areas of Oklahoma.
Local Kansas governments in counties along the Kansas
and Oklahoma boarder have also held cooperative plan-
ning meetings.
58
One key element of planning is to clearly delineate
roles and responsibilities. For example, says one of the
delegate reports: “North Dakota took the position that
the government’s job is to help plan/facilitate housing,
run sewer lines, and lay roads. The role of building
new housing stock should be the job of private indus-
try.”
59
Cooperative planning between government and
business can apply to road infrastructure just as easily
as it can apply to housing infrastructure. As the city
administrator for Kiowa City, Kansas said in a Kansas-
Oklahoma planning meeting: “There is merit in coming
together. Oil companies are not the big bad wolf. They
are businesses.”
60
Many businesses have learned as much as governments
with regard to past oil boom experiences—and choose
to take a proactive approach to the known infrastructure
issues. For example, Shell Oil, one of the three major
leaseholders associated with the Mississippian Lime play,
has a policy of proactively coordinating its transporta-
tion plans with local government offcials. When Shell
enters into a new county to conduct it exploration work,
company offcials meet with the county road and bridge
department and county commissioners to explain its
business goals and to seek opportunities to work with
the county to ensure that both parties interests are con-
sidered in the company’s business plans. Shell will also
work with the road and bridge department within the
county to identify the safest routes for Shell’s employee’s
and contractor’s vehicles to travel. Shell will then fle an
approved route map with the county and will require all
58 Yvonne Miller, “How to Prepare for and Capitalize on the Oil Boom?” Alva Review-Courier, February 8, 2012
59 http://www.kansascommerce.com/DocumentView.aspx?DID=1057
60 Yvonne Miller, “How to Prepare for and Capitalize on the Oil Boom?” Alva Review-Courier, February 8, 2012
48
of its employees and contractors to travel only on the
approved route. Failure to do so will result in corrective
action. If required, Shell will also make safety enhance-
ments to the approved routes to include the addition of
safety signage and road/bridge upgrades. Shell regularly
follows up with the county to maintain an open channel
of communication and to address concerns and unfore-
seen issues, if they arise. Shell monitors road conditions
daily along the approved routes and will work closely
with the county to maintain a safe roadway for Shell
and the community. If the company negatively impacts
a road, the company will work in coordination with the
county to repair the road at Shell’s cost.
61
Delineating roles between different jurisdictions of
government may be more important than delineating
roles between industry and government. Headwaters
Economics, a non-proft organization that studies rural
economies and land planning issues, has undertaken sev-
eral studies related to the impact on local communities
61 Author’s communication with offcials from Shell Oil.
62 See, for example: “Benefting from Unconventional Oil: State Fiscal Policy is Unprepared for the Heightened Community Impacts
of Unconventional Oil Plays,” April 2012. http://headwaterseconomics.org/
related to oil and gas booms. A prominent position
taken by this group concerns the split between local and
state government with regard to oil and gas tax revenue.
Since most of the real impact falls under the jurisdiction
of local government, Headwaters Economics criticizes
fscal systems that distribute a disproportionate share of
tax revenues away from local government toward state
government (especially if the state government does
not have clear policies related to how it will reallocate
the money to local governments, as demand requires).
62
One news report related to the Eagle Ford Shale in Texas
illuminates the importance of the point. In LaSalle
County, Texas, heavy truck traffc has severely degraded
the county’s “farm-to-market” road network. The chief
administrator for LaSalle County estimates that upgrad-
ing the county’s 230 miles of roads to withstand the
drilling-related traffc would cost $100 million. Yet the
county’s entire budget is about $6 million.
63
The wors-
ening road conditions and surge in traffc have caused a
63%
66%
39%
11%
35%
37%
34%
61%
89%
65%
0%
20%
40%
60%
80%
100%
Colorado Kansas Montana North Dakota Wyoming
Local Share State Share
Chart 27
Local versus State Government Shares of Oil and Gas Related Taxes and Royalties, Select States
Source: Headwaters Economics; Center for Applied Economics, KU School of Business
49
spike in traffc accidents in several counties in the Eagle
Ford Shale region. Another news report said: “County
judges in fve counties—Frio, LaSalle, Zavala, Dimmit
and Webb—were added to TxDOT’s energy task force
in May [2012]. The counties hope to have more of a
voice in state decisions, including how to get more tax
revenue from drilling to pay for road upkeep.”
64
(Related:
A study focusing on DeWitt County, Texas projected,
as an average, that road upgrade costs related to the life
of the Eagle Ford Shale could sum to approximately
$133,000 per well.
65
)
Chart 27 replicates research published by Headwaters
Economics, with Kansas added for comparison.
66
Local
governments in Kansas retain more oil and gas related
taxes than do local governments in the comparison states.
Based on the Headwaters Economics metric, local gov-
ernments in Kansas would seem to have better control
over the challenges that may arise from development
of the Mississippian Lime. The comparatively sound
fscal arrangement in Kansas—combined with proactive
cooperation with producers—should work to smooth
the planning process and facilitate better stakeholder
cooperation than has existed in other states. (Note that
metrics like those promoted by Headwaters Economics,
while useful, do not necessarily have a straight forward
interpretation. They require a detailed knowledge of a
particular state’s fscal system. In Texas, for example,
the state government collects the severance tax—but
current law dedicates the funds, in part, to the state’s
Permanent School Fund; in effect, an allocation to “local
government.” A change in allocation requires legislative
approval.
67
)
ESTIMATING POTENTIAL ECONOMIC IMPACTS IN
KANSAS
In 2011, Governor Brownback and the Kansas Leg-
islature (via SB 198) designated 50 counties as Rural
Opportunity Zones. New residents moving into these
counties, assuming they meet specifc criteria, become
eligible for a zero income tax rate for up to fve years
or assistance paying off student loans. To qualify as a
Rural Opportunity Zone, counties had to have experi-
enced population loss of at least 10 percent between the
2000 Census and the 2010 Census. With reference to
Map 2, 75 percent of the Mississippian Lime counties
also qualify as Rural Opportunity Zones—including
the current target counties of Barber, Comanche, and
Harper. Combined with the Rural Opportunity Zone
policies, the Mississippian Lime could act as a powerful
catalyst to the economic development sought by Kansas
lawmakers and citizens.
Attempting to estimate the economic impact of the
Mississippian Lime play on the state of Kansas requires
assumptions related to several uncertainties. For
example:
• What percentage of the geography shown in
Map 2 will warrant drilling?
• How many wells will producers choose to drill?
At what rate will they drill them?
• To date, the primary producers with lease con-
tracts reside outside of Kansas. How many
well-related jobs will consist of out-of-state
workers versus in-state workers? How much will
the out-of-state workers spend on the goods and
services offered by Kansas-based businesses?
• How much oil or gas will the average well pro-
duce? What percentage of each well’s produc-
tion will consist of oil versus natural gas?
• What price will the oil or gas fetch? Will the
price stay high enough to warrant horizontal
drilling costs? Will the relative price of oil and
gas change in a way that makes other plays more
economic than the Mississippian Lime play?
63 Ana Campoy, “Drilling Strains Rural Roads,” Wall Street Journal, July 27, 2012, p. A3.
64 http://www.mysanantonio.com/news/local_news/article/Drilling-takes-its-toll-on-roads-and-people-s-3690962.php#page-2
65 http://www.caller.com/news/2012/jul/02/study-shows-one-eagle-ford-shale-countys-road/
66 “Benefting from Unconventional Oil: State Fiscal Policy is Unprepared for the Heightened Community Impacts of Unconven-
tional Oil Plays,” April 2012, p. 16.
67 http://www.co.dewitt.tx.us/ips/export/sites/dewitt/downloads/Press_Release_Road_Damage_Cost_Allocation _Study_fnal.pdf
50
• What share of the royalty revenue generated
from production will circulate in the Kansas
economy?
• How much will tax revenues increase as the
result of the drilling and production processes?
A simulation model developed by the Center for Applied
Economics at the University of Kansas School of Busi-
ness provides some insight into these questions. The
discussion below outlines the framework and the results
related to select scenarios. Appendix A offers additional
details about the simulation model and the economic
impact estimation procedures.
The simulation model, which reports inputs and outputs
on a quarterly basis, begins with the following Baseline
Scenario (which is based on 10 calendar years, beginning
in January of 2013 and ending in December of 2022):
• In 2013, producers will drill 75 wells per quar-
ter. Each year, the number of wells drilled will
increase by an average of 25 per quarter. So,
producers will drill 100 wells per quarter in 2014,
125 per quarter in 2015, and so on until the
pace reaches 300 per quarter in the last scenario
year of 2022. This step change implies a total
of 7,500 wells—less than half the projected
number of potential wells (see Appendix A).
• Because out-of-state companies currently con-
trol most of the leases related to the horizontal
Mississippian Lime play, the baseline number
of Kansas-based well-drilling jobs begins at
zero in 2013 and grows by 2.5 percent each
year, implying that 22.5 percent of well-drilling
jobs will be Kansas-based jobs by 2022. (A
Kansas-based job is one in which the income
earned can be legitimately counted as belonging
to a Kansas resident. Jobs executed in Kansas
by residents of another state do not count as
Kansas-based jobs.)
• The Baseline Scenario—and every other sce-
nario—assumes a total of 60 drilling-related
jobs per well, with each well taking one month
to complete.
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2
0
1
3
-
Q
1
2
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Baseline Scenario 1 Scenario 5 Scenario 6
Chart 28
Growth of Kansas Income Resulting from Select Scenarios Related to the Mississippian Lime Play
Source: Center for Applied Economics, KU School of Business
51
• All jobs not considered Kansas-based jobs
assume a per diem per worker of $125 per
day. The hotel sector of the Kansas economy
receives $100 per day from each out-of-state
worker and the restaurant sector receives $25
per day. The expenditures equal new economic
activity that would not occur without the hori-
zontal-drilling Mississippian Lime play.
• The Baseline Scenario assumes that each well
supports 80 jobs related to the construction
sector of the economy. It counts 100 percent
of these jobs as Kansas-based jobs.
• The Baseline Scenario sets the price of oil at
$90 per barrel and sets the price of natural gas
at $3.50 per thousand cubic feet. Additionally, it
sets the production from each well at 55 percent
oil and 45 percent natural gas.
• The Baseline Scenario assumes that 100 per-
cent of the royalties earned from each well will
remain in Kansas as Kansas-based income. It
sets the royalty rate at 20 percent of the produc-
tion value from each well.
To build intuition about how changes to particular
variables will infuence the economic impact of the
Mississippian Lime play, a description of six scenarios
follows. Each scenario makes a 10 percent change rela-
tive to the baseline level of one particular variable. The
scenario numbering scheme ranks them from the most
positive to the least positive economic impact relative to
the Baseline Scenario.
Chart 28 illustrates how the Baseline Scenario, Scenario
1, Scenario 5, and Scenario 6 would infuence the growth
of aggregate Kansas income. Each scenario except
Scenario 6 assumes a steady increase in the pace of well
drilling. Scenario 6 offers one defnition of a pessimistic
scenario: it includes all elements of the Baseline Scenario,
except that the pace of well drilling equals 25 wells per
quarter for 10 years.
The Baseline Scenario would add an additional $166
million to the Kansas economy in the frst quarter of
2013. As producers drill an annually-increasing number
of wells (in stepwise fashion as per assumption) and
market the oil and gas, Kansas income begins to accu-
mulate each quarter. By the frst quarter of 2022, the
direct jobs, indirect jobs, and royalties associated with the
Mississippian Lime play contribute about $1.15 billion
each quarter to total Kansas income. Scenario 1 escalates
income growth more quickly than the Baseline Scenario
and adds about $1.3 billion to Kansas income by the frst
Table 6
Economic Impact Metrics Resulting from Select Scenarios Related to the Mississippian Lime Play
(Dollars in Millions)
Scenario
Performance Metric Base 1 2 3 4 5 6
Avg. Increase in In-State 1,908 2,100 1,954 1,930 1,886 1,790 161
Job Count per Quarter (1,717) (1,863) (1,886)
Avg. Increase in In-State $29.0 $31.8 $29.7 $29.4 $28.4 $27.4 $2.5
Income per Quarter ($26.0) ($28.1) ($28.4)
Avg. Increase in State $4.4 $4.9 $4.4 $4.9 $4.4 $4.4 $0.40
Severance Tax per Quarter ($4.0) ($4.4) ($4.0)
Avg. Increase in O&G $42.8 $47.1 $42.8 $47.3 $42.8 $42.8 $3.6
Property Tax per Quarter ($38.6) ($42.8) ($38.4)
Avg. Increase in Other
State & Local Taxes $3.6 $3.9 $3.7 $3.7 $3.6 $3.4 $0.31
($3.3) ($3.5) ($3.6)
Source: Center for Applied Economics, KU School of Business
Notes: Oil and gas property tax calculations follow the Kansas Department of Revenue protocols using a discount rate of 15% and an av-
erage annual operating cost per well of $500,000 in year one; $250,000 in year two; and $125,000 thereafter. The property tax calculations
also assume 140 total mills, which is the average total mills levied within the Mississippian Lime counties identi?ed in Map 2 from 2005 to
2010. Estimates for Other State & Local Taxes exclude state corporate income taxes and property taxes levied on properties classi?ed as
commercial/industrial due to unmanageable estimation uncertainties.
52
quarter of 2022. Scenario 6 escalates income growth less
quickly than the Baseline Scenario and adds about $1.0
billion to Kansas income by the frst quarter of 2022.
Scenarios 2 and 3 ft between the Baseline Scenario and
Scenario 1. Scenario 4 fts between the Baseline Scenario
and Scenario 5.
By design, Scenario 6 is a signifcant outlier. It basically
assumes that the Mississippian Lime play will gain no
more drilling-related momentum than it has experienced
to date. A “slow” pace of drilling is the best way to quan-
tify the economic impacts associated with a pessimistic
scenario (regardless of why that outcome occurs). Sce-
nario 6 adds about $58 million to the Kansas economy
in the frst quarter of 2013. By the frst quarter of 2022,
the direct jobs, indirect jobs, and royalties associated with
the Mississippian Lime play contribute about $103 mil-
lion each quarter to total Kansas income. (A complete
abandonment of horizontal drilling related to the Missis-
sippian Lime play would result in zero economic impact.)
Table 6 reports additional information related to the
economic impact of each scenario. To help facilitate
comparisons among the scenarios, Table 1 reports aver-
age increases per quarter for the various metrics. (Note
from Chart 28 that each year produces a signifcant
step change because of the assumption about how the
pace of change in well drilling takes place. The major
step change in each year is a straightforward part of the
calculated 10-year quarterly average.) Each scenario has
a linear character based on a 10 percent change, so the
reader can adjust the average quarterly change upward or
downward in proportion to different rates of change in
the variable. For example, with regard to Scenario 2, a
10 percent increase in the growth rate of in-state drilling
jobs results in a quarterly-average job count that is 2.3
percent higher than the baseline count and a quarterly-
average income accumulation that is 2.8 percent greater
than the baseline accumulation. An additional 10
percent increase in the growth of in-state drilling jobs
will double the percent changes from baseline—or, put
another way, a 20 percent increase in in-state drilling
jobs would increase the quarterly-average job count by
4.6 percent higher than baseline count and a quarterly-
average income accumulation that is 5.6 percent greater
than the baseline accumulation. (The variables will
interact if one assumes that they change simultaneously.
However, as a rough approximation, adding the quarterly
averages for each variable will provide intuition about
how different combinations of variables and different
growth rate assumptions will contribute to the overall
economic impact.)
Scenario 1: Increase (decrease) the pace of well drilling by 10
percent per year from baseline.
Not surprisingly, the pace of well drilling generates the
largest (positive or negative) economic impact of the six
scenarios, relative to the Baseline Scenario. Well drill-
ing supports jobs (directly and indirectly) and generates
income from royalties and business profts. The stream
of royalty incomes and business profts, in turn, support
additional jobs and business profts as it circulates in the
Kansas economy. The income generated from jobs, com-
merce, and production supports additional tax revenue
for state and local government.
Scenario 1 (a 10 percent increase in wells drilled) results
in 8,250 wells drilled relative to the baseline level of
7,500 (a 10 percent decrease results in 6,750 wells). As
explained in Appendix A, however, the Mississippian
Lime might yield a projected maximum number of
16,069 horizontal wells. If true, in the context of the
scenario framework, that would imply a 114 percent rate
of increase in the number of wells drilled. Such a rate
of increase would roughly double the fgures reported
in Table 6.
Scenario 2: Increase (decrease) the pace of Kansas-based drilling
jobs by 10 percent per year from baseline.
The second-place rank of this scenario (based on job and
income growth) underscores the point that job creation
drives the economic impact estimates more than the
royalty income generated by production. This scenario,
relative to Scenario 1, also helps to illustrate another
(obvious) point: the incomes generated by job creation
helps support Other Taxes but production value drives
Severance Taxes and Oil and Gas Property Taxes.
Scenario 3: Increase (decrease) the baseline price of oil and gas
by 10 percent.
53
This scenario ranks third in economic impact from an
overall job count and income perspective. However, it
has roughly the same impact as Scenario 1 from the per-
spective of Severance Taxes and Oil and Gas Property
Taxes, underscoring the importance of market prices for
Kansas producers and Kansas governments.
Related to oil and gas property taxes, the table below
provides estimates for the assessed value implied by
the simulations model’s representative well for three
different prices: the baseline price of $90 per barrel
of oil and $3.50 per thousand cubic feet; the baseline
price plus 10 percent; and the baseline price minus 10
percent. The reader can use these estimates to calculate
the property tax revenue potential per well in a specifc
taxing jurisdiction.
Baseline +10% -10%
Year 1 $428,337 $468,066 $380,208
Year 2 352,672 385,651 312,778
Year 3 294,252 322,018 260,715
Year 4 240,319 263,275 212,651
Year 5 189,086 207,470 166,994
Year 6 141,137 155,244 124,263
Year 7 96,803 106,954 84,753
Year 8 56,852 63,438 49,150
Year 9 21,845 25,310 17,954
Scenario 4: Decrease the royalties that remain in state by 10
percent from baseline.
This scenario, relative to the Baseline Scenario, illustrates
the relatively small jobs impact that royalty income gener-
ates in the economic impact simulation.
Scenario 5: Decrease the Kansas-based construction-related jobs
per well by 10 percent from baseline.
As discussed in connection with Scenario 2, job creation
generates the strongest economic impact. The more
well-drilling jobs and well-support jobs that become
Kansas-based jobs, the more the overall Kansas economy
will beneft from the Mississippian Lime play.
Scenario 6: Hold wells drilled to 25 per quarter for 10 years
(and retain all other Baseline Scenario assumptions).
As discussed above, this scenario is intended to illus-
trate that the Mississippian Lime play may not fulfll
the optimistic expectations held by many stakeholders.
Producers in Oklahoma have reported successful out-
comes—and Sandridge Energy has publicly communi-
cated with potential investors that the Kansas geology
holds similar promise. But the Kansas-based activity still
needs to prove itself.
COALBED METHANE IN EASTERN KANSAS
The well-known phrase “canary in a coal mine” derived
from the known hazards of noxious gas that could
imperil coal miners. Miners would carry caged birds
into mines with them. If harmful gas flled the air, the
birds would succumb before the miners, providing a
warning signal.
Methane (and other gases) enters coal through a process
of absorption. The gas lines the pores of the coal in a
near-liquid state.
68
The gas often leaks from naturally-
occurring fractures in coal formations.
Butler
Clay
Cowley
Dickinson
Douglas
Geary
Jefferson
Leavenworth
Marion
Marshall
Morris
Pottawatomie
Riley
Shawnee
Washington
Wyandotte
238 (0.6%)
Allen
26 (0%)
Anderson
18 (0%)
Atchison
178 (0.1%)
Bourbon
2 (0%)
Brown
2 (0%)
Chase
155 (0.3%)
Chautauqua
1 (0%)
Cherokee
108 (0.4%)
Coffey
56 (0.1%)
Crawford
12 (0%)
Doniphan
52 (0%)
Elk
4 (0%)
Franklin
12 (0%)
Greenwood
14 (0%)
Jackson
44 (0%)
Johnson
661 (7.4%)
Labette
34 (0%)
Linn
13 (0%)
Lyon
316 (0.8%)
Miami
1892 (26.3%)
Montgomery
16 (0%)
Nemaha
778 (32.3%)
Neosho
3 (0%)
Osage
6 (0%)
Wabaunsee
1911 (31.2%)
Wilson
43 (0%)
Woodson
Map 3
Coalbed Methane Activity in Eastern Kansas,
Wells Drilled (Share of Cumulative Production)
Source: Kansas Geological Survey
54
0.09 0.08 0.10 0.14 0.14 0.32
0.63
1.8
5.6
8.5
13.5
22.7
36.2
44.3
43.8
39.1
36.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
1
9
9
5
1
9
9
6
1
9
9
7
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8
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o
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B
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o
n
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f
C
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b
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F
e
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t
Chart 30
Kansas Coalbed Methane Production, 1995-2011
Source: Kansas Geological Survey; Independent Oil & Gas Services (Red Top News); U.S. Energy Information Administration
57161
0
1
2
329
6
8
8
5
8
4
4
9
3
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03
3
4
0
4
67
6
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0
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$8.00
$9.00
0
200
400
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800
1,000
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1
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s
Count of CBM Wells Drilled Kansas Natural Gas Price (2010$)
Chart 29
Kansas Coalbed Methane Wells Drilled and Kansas Natural Gas Price, 1981-2011
55
Coalbed methane, or CBM, counts as an “unconven-
tional” hydrocarbon source because producers must
access it in ways technically different from (and typically
more costly than) the techniques used to produce natural
gas from “conventional” source rocks (like sandstone).
Coal has much lower permeability than conventional
source rocks. A signifcant element of stimulating gas
production deals with dewatering the coalbed to relieve
the pressure that traps the gas in the pores of the coal.
Two coal basins—known as the Forest City and Chero-
kee basins—lie underneath the eastern quarter of the
state of Kansas.
69
With reference to Map 3, the Forest
City Basin generally encompasses the upper half of Cof-
fey, Anderson, and Linn Counties and the counties north
of those; the Cherokee Basin generally encompasses the
counties south of those. (A formation known as the
Boubon arch overlaps the two basins.) These basins
contain many different strata of coal of varying depths
and breadths. A typical wellbore can encounter up to 14
different coal beds, each of which may yield methane.
70
According to geologists at the Kansas Geological Survey:
“The gas storage capacity of a coal is a complex func-
tion of reservoir temperature and pressure, composition,
micropore structure, and molecular properties of its
absorbed gas.”
71
The historical record indicates that producers in south-
eastern Kansas had some commercial success with CBM
production from the 1920s into the 1930s.
72
Despite
this early record of success, the CBM resource did not
attract serious attention until the 1980s. The Kansas
Geological Survey only has records of CBM wells dating
back to 1981. This date marks the beginning of a federal
government tax incentive related to CBM production
from new wells, which operated until 1992. The federal
government extended the tax incentive from 1993 to
2002—but the extended incentive applied to gas pro-
duced from “recompleted” wells rather than new well.
Map 3 illustrates that four counties within the Cherokee
Basin—Labette, Montgomery, Neosho, and Wilson—
account for about 80 percent of the CBM wells drilled
and about 97 percent of the cumulative production.
However, exploration has taken place in all of the blue-
colored counties on the map.
Chart 29 and Chart 30 reveal that, although interest in
CBM dates back to 1981, notable progress with develop-
ing this resource did not begin until about 2000. The
uptick in drilling activity in the early 1990s seems coinci-
dent with the up-coming termination of the federal tax
credit program. Not surprisingly, the most concerted
effort coincides with the escalation of natural gas prices.
(However, a substantial amount of learning no doubt
accrued in the two decades prior to the price escalation
that allowed Kansas producers to confdently respond
to the price signals.
73
) The rapid escalation in drilling
illustrated by Chart 29 had an obvious outcome on the
amount of annual coalbed methane production shown
in Chart 30. For perspective, despite the impressive
boom in the cumulative production of coalbed methane,
it amounted to 9.4 percent of total natural gas produc-
tion over the 2005-to-2011 time period, with the highest
percentage equaling 12.2 percent in 2009.
The U.S. Energy Information Administration tracks
coalbed methane production among the states. Records
for most states begin in 2005. However, the records for
three states begin in 1989: Alabama, Colorado, and New
Mexico got a head start in meaningful CBM production.
Despite the head start, those states’ production seems
to have peaked. Alabama’s CBM production peaked in
1998; Colorado’s in 2002; and New Mexico’s in 1997.
68 http://en.wikipedia.org/wiki/Coalbed_methane
69 K. David Newell, et al., “Geological and Geochemical Factors Infuencing the Emerging Coalbed Gas Play in the Cherokee and
Forest City Basins in Eastern Kansas,” Kansas Geological Survey, Open-File Report 2004-17.
http://www.kgs.ku.edu/PRS/publication/2004/AAPG/Coalbed/P1-02.html.
70 K David Newell, et al., “Coalbed Gas Play Emerges in Eastern Kansas Basins,” Oil and Gas Journal, December 23, 2002, p. 36.
71 Ibid., p. 37.
72 William T. Stoeckinger, “Kansas Coalbed Methane Comes on Stream,” Oil and Gas Journal, Vol. 88, No. 23, June 1990, 88-90.
73 K. David Newell, “Communications from Individuals Regarding Their Role in the History of the Coalbed Natural Gas Play in
Eastern Kansas, circa 1990 to 2010,” Kansas Geological Survey, Open-File Report 2010-15, November 17, 2010.
http://www.kgs.ku.edu/PRS/publication/2010/OFR10_15/KGS_OFR_2010-15.pdf
56
Table 7 reports the cumulative production for those
states with records of CBM production. Colorado,
Wyoming, and New Mexico produce signifcantly more
CBM than the other states. By the U.S. Energy Informa-
tion Administration’s reckoning, Kansas ranks 8
th
out of
13 states. (The EIA fgure of 211 bcf contrasts with
the fgures reported in Chart 30, which sum to 200 bcf.)
Table 7
State-by-State Cumulative Coalbed Methane
Production, 2005-2010, Billions of Cubic Feet
Share of U.S.
Cumulative Cumulative
Production Production
State 2005-2010 2005-2010
Alabama 655 5.95%
Arkansas 17 0.15
Colorado 3,039 27.62
Kansas 211 1.92
Louisiana 2 0.02
Montana 73 0.66
New Mexico 2,695 24.49
Oklahoma 377 3.43
Pennsylvania 43 0.39
Utah 422 3.84
Virginia 531 4.83
West Virginia 149 1.35
Wyoming 2,789 25.35
U.S. 11,003 100.0%
Source: U.S. Energy Information Administration
Scientists at the Kansas Geological Survey estimate that
the coalbeds of Kansas may contain about one trillion
cubic feet of natural gas.
74
At the rate of production
shown in Chart 30 for 2008 and 2009, Kansas could
produce coalbed methane for about 22 years. However,
based on current economics, as suggested by the pattern
of drilling and production illustrated by Chart 29 and
Chart 30, natural gas prices need to be at least $5.00
per thousand cubic feet for this level of production to
sustain itself.
Assessing History: How the
Oil and Gas Industry Has
Contributed to the Kansas
Economy
Entrepreneurial success often results from serendipity.
New value propositions frequently emerge through
accidental discoveries about how to create value for
people. Native Americans had long attributed heal-
ing properties to the petroleum that seeped out of the
ground. But no one attributed to it much commercial
potential except as a medicine until around 1850s. People
used whale oil to light their lamps. In fact, about 1830, an
enterprising Johnson County man had a successful busi-
ness helping to supply pioneers heading out on the Santa
Fe Trail. The slick sheen of petroleum on the water in
his well disappointed him—because he thought of value
as supplying fresh water—until he discovered that he
could sell the slick stuff as lubricant for wagon wheels.
75
The oil industry began as the result of similar serendip-
ity—serendipity related to the mining of salt. Salt had
a known commercial value, and the production of salt
from salt water wells had an annoying byproduct in
northwestern Pennsylvania: petroleum seepage. A man
named Samuel Kier had to dispose of the petroleum
that seeped into his salt well. When he discovered that
it caught fre, his entrepreneurial urges drove him to
experiment with various petroleum-based products.
Petroleum jelly (an ointment used in a medicinal man-
ner familiar to Native Americans) remains with us today,
but it did not sell well then. Kier’s development of a
cost-effective method for producing kerosene had more
success. Kerosene became an excellent substitute for
whale oil as a lamp fuel. In 1853, in order to market
kerosene, Kier created the frst oil refnery, which he
located in Pittsburg, Pennsylvania, and refned the oil
gathered from area salt mines.
76
The commercial potential of kerosene motivated people
to search for oil for its own sake. A man named Edwin
Drake (along with a technically competent assistant
named “Uncle Billy” Smith) had the idea that the meth-
ods used for salt water well drilling could be used for oil
well drilling. He was partly right. The problem came
when the wells would fll with water and collapse. He
innovated by frst driving an iron pipe to the bedrock
and then drilled inside the pipe to prevent collapse. It
worked—and the technique became a standard feature
of drilling operations—the same feature (dramatically
74 Private conversation with Dr. David Newell of the Kansas Geological Survey.
75 Craig Miner, Discovery! (Wichita, Kansas: KIOGA, 1987), p. 13.
76 http://en.wikipedia.org/wiki/Samuel_Martin_Kier
57
advanced) that also protects drinking water supplies dur-
ing current-day drilling operations. Historians typically
credit Drake as drilling the nation’s frst commercial oil
well in Titusville, Pennsylvania in 1859.
77
The frst ship-
ment of oil from that well reportedly went to Samuel
Kier’s refnery in Pittsburg.
78
The success of Drake’s drilling method and Kier’s mar-
keting innovations drew people into the oil industry. The
frst oil boom happened in northwestern Pennsylvania
from 1859 to 1870.
79
Talented men began to learn the
risks and rewards of the oil business.
A BRIEF ECONOMIC HISTORY OF OIL AND GAS IN
KANSAS
Map 4 shows that those talented men began to migrate to
other oil-rich locations—Kansas being among the frst.
Oil entrepreneurs knew Kansas had potential because
the frst attempt at drilling for oil in Kansas occurred
near Paola, Kansas in 1860.
80
By the mid-1860s, Fort
Scott, Kansas had become one of the state’s frst “boom”
towns, and began piping natural gas to homes.
81
George W. Brown, editor of a Lawrence, Kansas news-
paper known as the Herald of Freedom, became a key
fgure in early Kansas oil and gas history. He had come
to Kansas in 1854 from Pennsylvania where he had
edited a newspaper. Brown’s Pennsylvania roots and
connections gave him a keen awareness of the seminal
oil activity taking place there, and he understood what
it implied for Kansas. Brown organized the drilling
of the Paola well in 1860, along with many other wells
thereafter.
82
1925
1939
1912
1884
1880
1901
1905
1937
1927
Map 4
Major Migrations of Oil Men
Source: Samuel W. Tait, Jr., The Wildcatters: An Informal History of Oil-Hunting in America, p. xiv.
77 http://en.wikipedia.org/wiki/Edwin_L._Drake
78 http://en.wikipedia.org/wiki/Samuel_Martin_Kier
79 http://en.wikipedia.org/wiki/Pennsylvanian_oil_rush
80 Miner, Discovery!, p. 16.
81 Ibid., p. 47
58
William M. Mills came to Kansas from Pennsylvania in
1884 (the man represented by the arrow on Map 4). His
central role in the successful development of Kansas oil
and gas felds earned him the respectful moniker: “the
Drake of the western feld.”
83
Mills had all the attributes
of an iconic entrepreneur and pioneer. He made and
lost a fortune in Pennsylvania before he decamped to
eastern Kansas to put in the grinding due-diligence and
relationship-building necessary to rebuild the fortune
he lost. Before ultimately settling in the town of Paola,
Mills (and his wife) explored as far west as Salina and as
far south as Coffeyville. He became as knowledgeable as
anyone at the time about oil and gas prospects in Kansas.
Mills’ explorations and partnerships facilitated the iconic
status of two other partnerships in Kansas petroleum-
industry history: McBride & Bloom and Guffey &
Galey. Albert McBride (Miami County) and Camden
Bloom (Montgomery County) were two Kansas boys
that, despite their youth, had profciency in the art and
science of well drilling. They became the contractors of
choice in their era; and drilled Norman #1 (in Neode-
sha in 1892), which, according to the National Historic
Landmarks Program, signifes the beginning of develop-
ment of the Mid-Continent oil feld.
84
Mills made the
acquaintance of James Guffey and John Galey while in
Pittsburg, Pennsylvania on a trip to recruit venture capital
partners. Guffey and Galey had wildcatter blood in their
veins and seized the opportunity. As Kansas petroleum
industry historian Craig Miner put it: “Guffey and Galey
had more than experience: they had also the daring nec-
essary to plunge into Kansas without hesitation. The
two were described as ‘extensive and daring operators’
in the Pennsylvania feld, and there was no question that
their vision and determination corresponded well with
Mills’ own. An observer at the time commented of the
association between Mills, Guffey, and Galey that ‘These
men, taken together, were the embodiment of American
vigor and push.’”
85
Natural gas had a better commercial market than oil
when Mills got started in Kansas. Town people under-
stood the utility of gas for lighting, cooking, and heating
(both residentially and industrially). But Mills and his
associates systematically (and relatively inexpensively)
acquired land leases and drilled oil wells, often plugging
them once they discovered oil-producing wells.
Of course, Mills and associates were not alone; many
other entrepreneurs had entered the business. How-
ever, the overall development of the market took place
slowly. Producers faced a chicken-and-egg problem.
Commercially viable oil production required an infra-
structure; infrastructure required commercially viable
oil production.
The arrival of John D. Rockefeller’s Standard Oil (via its
Forrest Oil subsidiary) in the mid-1890s, which bought
holdings from Guffey and Galey, resolved the chicken-
and-egg problem. It brought investment capital, access
to markets, industry know-how, and plans to build a
refnery in Neodesha (1897), which ended up refning
about 3,000 barrels a day by 1903.
The result was “the boom of 1903.” Craig Miner’s
description of the boom in 1903 sounds just like stories
about Williston, North Dakota in 2012. (Multiply each
dollar fgure in Miner’s description by 25 to approximate
today’s dollars.)
86
The growth of towns in the oil and gas belt
seemed magic. Iola built some of the largest
gas engines in the world in 1903, boasted one
of the most complete cement plants west of the
Mississippi, the largest number of zinc smelting
retorts in the U.S., and probably the only sulph-
uric acid works in the world where natural gas
was used in the reduction. In six years, Iola had
grown from 1,500 to 10,000 and had a monthly
payroll of $100,000. It was constructing an
$80,000 water works and an electric light plant,
and had a $150,000 electric interurban running
82 Ibid., p. 14.
83 Ibid., p. 32.
84 http://en.wikipedia.org/wiki/Norman_No._1_Oil_Well
85 Miner, Discovery!, p. 38.
86 http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm
59
from the Neosho River through Iola and on to
Gas City, Lanyonville and LaHarpe. Manufac-
turing included an ice plant and cold storage
company with a daily capacity of 50 tons, an
iron foundry, a planning mill, a creamery, four
and feed mills and a saw mill. Independence in
1903 opened the Carl-Leon Hotel at a cost of
$50,000 for the building and $15,000 for the
furnishings. It had a spacious offce complete
with a massive freplace of Independence bricks,
fred using the town’s natural gas, and rooms
equal to anything in Kansas City. There were
electric bells in the Carl-Leon, fre alarms, bell
boy service and reading and writing rooms.
Chanute in 1903 established a stock exchange
at the Hetrick opera house, primarily to aid
promoters in placing the stock of new oil
companies. Oil roads and electric traction
lines into the oil felds were suggested daily.
All this, most thought, was courtesy of oil and
gas combined with the “energy and hustle of
fore-sighted businessmen” who could see that
“there are other very good opportunities for
making money in the Kansas gas and oil feld
apart from getting it from under the surface of
the ground.”
Economic statistics seemed like fantasy. In
1905, it was estimated that the oil and gas
industry had added $50 million to the value of
Kansas property. It had “doubled the popula-
tion of nearly every town in the oil region and
brought many men of national reputation in
the feld of fnance within her borders. The
industry has transformed an agricultural state
into a commercial and industrial empire.” In
November, 1903, there were 200 drilling rigs
at work in Kansas, manned by 400 drillers and
400 tool dressers. Supply houses serving the
Kansas oilpatch were making $200,000 a month,
and hotel receipts in the Iola area were about
$500,000 a year…
87
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1
9
0
0
1
9
0
5
1
9
1
0
1
9
1
5
1
9
2
0
1
9
2
5
1
9
3
0
1
9
3
5
1
9
4
0
1
9
4
5
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
KS Share of U.S. Oil Producton KS Share of U.S. Gas Producton
Chart 31
Kansas Oil and Gas Production as a Share of U.S. Production
Source: Kansas Geological Survey; U.S. Energy Information Administration
60
Chart 31 illustrates the 1903 booms in Kansas in the con-
text of the central role Kansas played in the birth of the
U.S. oil and gas industry. As a share of U.S. production,
natural gas grew from 3.5 percent to 8.6 percent and oil
grew from 0.4 percent to 3.6 percent. (Table 8 provides
additional details about the time line of key events infu-
encing the movement of the curves in Chart 31.)
The gas share kept growing because the year 1903
foreshadowed another major Kansas oil boom—much
more substantial than the frst, illustrated by Chart 31
as the oil production boom starting in 1915. In 1903,
four businessmen in Augusta, Kansas met to discuss the
prospect of drilling for gas in order to heat and light the
city. To execute their plans, they formed the Augusta Oil,
Gas, Mining and Prospecting Company. A rig builder
and tool dresser recently recruited from Ohio to Kansas
got the business to drill a well. In July of 1903, the crew
hit gas at 1,356 feet.
88
Another entrepreneurial effort born of the new-found
understanding of how to create commercial value from
natural gas helped advance the industry in Kansas.
Much like Rockefeller’s insight that the oil industry could
beneft from disciplined management in a consolidated
holding structure, a man named Henry L. Doherty began
to acquire many dozens of city gas services under the
company name of Cities Service. Such an operation
required reliable supplies of gas. Mr. Doherty invested
in trained geologists to help. A geologist named Charles
Gould (with a partner) took on the task in 1913 of
exploring around the existing gas pipelines in Butler
County, Kansas. They produced a scientifcally detailed,
color-coded contour map that represented an important
innovation at the time.
Table 8
Select Events in Early Kansas Oil & Gas History
1860 First oil well drilled near Paola (Miami County)
1873 Gas discovered at Iola (Allen County)
1886 Small re?nery erected at Paola
1892 First commercial well (Norman #1) at Neodesha
(Wilson County)
1897 Standard Oil re?nery completed at Neodesha
1903 First 1,000 barrel/day well, Bolton ?eld
(Montgomery County)
1914 Discovery of Augusta ?eld (Butler County)
1915 Discovery of El Dorado ?eld (Butler County)
1917 Discovery of “Golden Lanes” (Greenwood County)
1922 Discovery of Hugoton gas ?eld (Seward County)
1923 Discovery of Fairport ?eld (Russell County)
Source: Daniel F. Merriam, “Exploring for Petroleum in the Flat-
lands: History of Oil and Gas Exploration in Kansas,” Oil-Industry
History, Vol. 3, No. 1, 2002, p. 56.
As with so many technological advancements, the skep-
tics abounded initially (Cities Service directors among
them).
89
But the science behind the color-coded maps
worked—beginning the long process discussed above
related to innovations that worked to minimize the
drilling of dry holes. The science found the gas—and
it found the oil (which had a lower priority at the time).
In 1914, the city fathers of El Dorado decided that they
wanted to drill for the city’s own gas source. After some
false starts, the new geological science worked in El
Dorado just as it had worked in Augusta. In 1915, crews
had discovered oil in a well called Stapleton #1. No one
realized it at the time, but they had discovered one of
the largest pools of oil in the continental United States.
The El Dorado boom commenced—aided strongly by
the demand for oil generated by World War I. Leases in
El Dorado reached $3,750 per acre. (In today’s dollars,
that would be 25 to 30 times more than current-day
leases fetch in relation to the Mississippian Lime play!)
The population of Butler County exploded, increasing
from 23,059 in 1910 to 43,842 in 1920, with most of the
surge happening after 1915.
Historian Craig Miner provides the following account
from a contemporary writing in the advanced stages of
the El Dorado oil boom, which signifcantly aided the
war effort: “Standing on an eminence at the western edge
87 Miner, Discovery!, pp. 93-94.
88 Ibid., p. 120.
89 Ibid., pp. 120-123.
61
of the city, the spectator can look for miles at an endless
feld of derricks set out in rows with all the regularity of
a new apple orchard. Up hill and down hill, the rows
run until they are lost in the distance. As a matter of
fact, there are more than a thousand derricks in sight,
each one pumping from mother earth the liquid that is
destined to play the biggest part in reclaiming the world
for democracy.”
90
Chart 32 converts the production data illustrated in Chart
21 (and implied by Chart 31) into infation-adjusted dol-
lars based on production volumes and prevailing prices.
Kansas offered an excellent platform from which to initi-
ate the oil boom in the Mid-Continent because much of
the gas and oil resided in relatively shallow depths which
wildcatters could reach with early drilling technologies.
91
As Chart 31 implies, however, other states have more
petroleum resources than Kansas. After the steady
depletions of the early oil discoveries and the Hugoton
gas feld, Kansas has consistently produced less than fve
percent of U.S. oil and gas volumes.
Table 9
Top-15 States, as Ranked by Upstream Industry
Average Share of State Gross Domestic Product,
1965-2010
Avg. Share of State GDP (%)
1965 1965 1985 2005
to to to to
Rank State 2010 1970 1990 2010
1 Alaska 26.3 12.4% 33.8 28.7
2 Wyoming 24.4 21.1 23.0 31.6
3 Louisiana 19.8 21.5 21.5 19.1
4 New Mexico 12.2 11.8 9.3 15.6
5 Oklahoma 10.8 8.9 9.8 14.5
6 Texas 9.8 9.2 9.6 11.3
7 North Dakota 4.8 2.6 6.8 5.2
8 Montana 3.4 2.7 3.5 4.3
9 Colorado 3.0 1.2 2.1 5.0
10 Utah 2.1 2.0 2.7 2.7
11 Kansas 2.0 4.1 2.5 1.6
12 Mississippi 1.9 2.6 2.6 1.7
13 Arkansas 1.7 1.1 1.1 3.1
14 West Virginia 1.6 1.2 1.6 2.4
15 Alabama 1.2 0.2 0.6 2.1
Source: U.S. Bureau of Economic Analysis; U.S. Census Bureau;
U.S. Bureau of Labor Statistics; Center for Applied Economics, KU
School of Business
90 Ibid., p. 118.
91 Merriam, “Advances in the Science and Technology of Finding and Producing Oil in Kansas,” pp. 30-33.
$0
$1
$2
$3
$4
$5
$6
1
9
0
0
1
9
1
0
1
9
2
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9
3
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1
9
4
0
1
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5
0
1
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6
0
1
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7
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1
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2
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2
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1
0
B
i
l
l
i
o
n
s
o
f
2
0
1
0
D
o
l
l
a
r
s
Oil Value Gas Value
Chart 32
Annual Market Value of Kansas Oil and Natural Gas (2010$)
Source: Kansas Geological Survey
62
THE UPSTREAM SECTOR AND KANSAS GROSS
DOMESTIC PRODUCT
Nevertheless, the dollars earned on Kansas production
have consistently made healthy contributions to the value
created in the Kansas economy. Table 9 provides a snap-
shot of the top-15 states with regard to the contribution
made to total state gross domestic product (GDP) by oil
and gas extraction activity (essentially, a signifcant frac-
tion of the upstream sector, as defned in this report)
from 1965 to 2010. The table also compares 5-year
average GDP shares for select time periods.
Note the signifcant variation among the states and the
select time periods. These variations relate to the pat-
terns of exploration, discovery, production, and price.
Nine of the 15 states show a higher average GDP share
for the 2005-2010 period than the 1985-1990 period.
These increases capture the surge in activity related to
the widespread unconventional (shale) oil and gas plays
along with the signifcant price surge beginning in 2004
and ending in 2009. (See Table B6 and Table B7 in
Appendix B for state-by-state data related to oil and gas
production volumes.)
Kansas producers benefted from the price surge. How-
ever, the state did not rank among the states with an
increased share of GDP related to oil and gas extraction.
Perhaps the Mississippian Lime plays will change that
in the next several years. More importantly, however, a
declining share of upstream-related GDP does not nec-
essarily convey a negative message. The Kansas oil and
gas industry has made a steady contribution to the Kan-
sas economy, but the state has increased its GDP in other
areas, thereby shrinking the stable contribution made by
oil and gas extraction. For example, a substantial amount
of economic growth in Kansas has taken place in the
Northeast corner of the state—around the Kansas City
area—a region with few oil and gas resources. This
growth has reduced the measured statewide economic
contribution made by the oil and gas industry, but it in
no way diminishes the regional (or statewide) importance
of the industry.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1
9
9
0
1
9
9
1
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1
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1
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2
0
0
0
2
0
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1
2
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2
2
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3
2
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0
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2
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2
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9
2
0
1
0
G
r
w
o
t
h
I
n
d
e
x
(
1
9
9
0
=
1
)
Oil Price Gas Price Payroll per Job Jobs GDP from Upstream Oil & Gas
Chart 33
Growth Trends of Oil and Gas Prices and Components of GDP
Source: U.S. Energy Information Administration; U.S. Bureau of Economic Analysis; Center for Applied Economics, KU School of Business
63
Chart 33 provides a brief tutorial on the interaction
of oil and gas prices and the gross domestic product
generated by oil and gas extraction activity over the
past two decades. Recall that Kansas oil and gas pro-
ducers behave as price takers: their production activity
has essentially no infuence on market prices and their
exploration, drilling, and production activity essentially
reacts to the production economics dictated by changing
market prices. The chart shows relative growth trends
among infation-adjusted: Kansas oil and gas wellhead
prices, the GDP from oil and gas, and the payroll (wages
plus benefts) per job for the people employed in the
sector. (Unlike elsewhere in the report, Non-employer
businesses and their revenues are not included in the
payroll and jobs computation, but will be embodied in
the GDP trend line.)
GDP is a measure of the market value of production. As
a practical matter, the government measures it with refer-
ence to employee compensation and before-tax business
profts. Chart 33 shows that GDP tends to track closely
with changes in the level of oil and gas prices. Statisti-
cally, for the years shown, changes in Kansas GDP in the
oil and gas extraction sector and the price of oil or gas
have a correlation coeffcient of about 0.85, indicating a
tight co-movement. Naturally, a signifcant amount of
that extra GDP goes to producers as before-tax proft.
But also note the trend in “Payroll per Job.” It has a
tight co-movement with the price of oil or gas, with an
oil-price correlation coeffcient of 0.89 and a gas-price
correlation coeffcient of 0.81. As in almost all sectors
of a well-functioning market economy, employees share
in the economic value they help create.
The “Jobs” trend in Chart 33 has a more nuanced eco-
nomic story. Jobs trended upward beginning in 2005
as oil and gas prices rose, but overall the trend in Jobs
shows an inverse co-movement (a negative statistical
relationship) with oil and gas prices over the time period
illustrated. Production—not price—drives jobs. The
Key
Less than 5%
5% to 10%
10% to 20%
Greater than 20%
Map 5
County-by-County Share of Jobs in the Upstream Sector
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau
64
change in jobs has a tight co-movement with the change in
oil or gas production (not illustrated): Jobs and oil pro-
duction has a correlation coeffcient of 0.92; Jobs and
gas production has a coeffcient of 0.77. The upward
trend in Jobs in 2005 resulted from the upward trend in
oil prices because the substantial price increases made it
economically worthwhile to increase production. (Gas
production did not increase. Despite the surge in natural
gas price that motivated a surge in drilling, as illustrated
in Chart 1, and especially the increase in coalbed methane
production illustrated in Chart 30, the added natural gas
production could not offset the declining production
from the Hugoton Gas Area, which represented about
45 percent of Kansas gas production during this time
frame.)
Map 5 helps provide a nationwide perspective about
the location of jobs in the oil and gas upstream sector.
Map 6 provides a Kansas close-up of Map 5. The maps
record the county-by-county average share, from 1998 to
2010, of all jobs in the upstream sector relative to all jobs
in the private sector. (The defnition of the upstream
sector is described below.)
As referenced above in connection to Kansas GDP, the
upstream sector makes a signifcant contribution to the
GDP generated in most parts of the state—except for
the northeast part of the state. As a simple illustration,
imagine drawing a line on Map 6 from the top corner of
Saline County to the Middle of Johnson County. Every
county that touches the line or is north of the line will
represent the northeast. On average, from 2005 through
2010, those counties represented about 53 percent of
Kansas GDP. With reference back to Table 9, removing
the northeast GDP from the calculation would increase
oil and gas extraction from 1.6 percent of Kansas GDP
to 3.4 percent. For the 2005 to 2010 time period that
0.0%
Doniphan
0.0%
Jewell
0.0%
Lincoln
0.0%
Marshall
0.0%
Republic
0.0%
Smith
0.0%
Wallace
0.0%
Brown
0.0%
Cherokee
0.1%
Wyandotte
0.1%
Geary
0.2%
Nemaha
0.2%
Shawnee
0.2%
Pottawatomie
0.2%
Mitchell
0.3%
Sherman
0.3%
Atchison
0.3%
Cloud
0.4%
Jackson
0.4%
Dickinson
0.5%
Osage
0.5%
Jefferson
0.6%
Clay
0.7%
Leavenworth
0.7%
Crawford
0.8%
Labette
0.8%
Riley
0.8%
Washington
0.9%
Ottawa
0.9%
Wabaunsee
1.0%
Johnson
1.0%
Bourbon
1.1%
Douglas
1.2%
Saline
1.5%
Lyon
1.9%
Rawlins
1.9%
Thomas
1.9%
Ford
2.0%
Wichita
2.3%
Cheyenne
2.4%
Harvey
2.4%
Morris
2.5%
Hodgeman
2.6%
Gray
2.9%
Hamilton
3.1%
Scott
3.4%
Gove
3.5%
Linn
3.5%
Edwards
3.9%
Chase
4.0%
Franklin
4.0%
Reno
4.2%
Miami
4.3%
Pawnee
4.3%
Marion
4.8%
Sumner
4.9%
Logan
5.3%
Ellsworth
5.5%
Montgomery
5.6%
Lane
5.6%
Sedgwick
6.0%
Decatur
6.4%
Anderson
6.5%
Osborne
6.5%
Finney
6.7%
Rush
6.7%
Butler
6.9%
Meade
7.1%
Cowley
7.1%
Wilson
7.3%
Comanche
7.7%
Phillips
7.8%
Neosho
8.4%
Norton
8.4%
Mcpherson
8.5%
Coffey
8.5%
Stanton
8.7%
Kearny
8.9%
Allen
9.6%
Sheridan
9.8%
Trego
10.3%
Haskell
10.9%
Greeley
11.0%
Clark
11.2%
Stevens
15.2%
Harper
17.1%
Seward
17.6%
Rice
17.7%
Kiowa
18.0%
Kingman
18.6%
Pratt
19.7%
Stafford
20.4%
Grant
21.4%
Ellis
22.9%
Elk
26.1%
Graham
28.4%
Greenwood
28.4%
Rooks
29.1%
Morton
29.6%
Barton
31.4%
Woodson
32.3%
Chautauqua
32.4%
Barber
42.2%
Ness
44.2%
Russell
Key
Less than 5%
5% to 10%
10% to 20%
Greater than 20%
Map 6
Kansas Close-Up County-by-County Share of Jobs in the Upstream Sector
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau
65
Key
$0.0 to $1.0
$1.0 to $25.0
$25.0 to $50.0
More than $50.0
$19 (49)
Allen
$17 (50)
Anderson
0
Atchison
$147.5 (6)
Barber
$166.6 (2)
Barton
$4.2 (71)
Bourbon
0
Brown
$86.6 (12)
Butler
$2.2 (76)
Chase
$19.3 (48)
Chautauqua
0
Cherokee
$5.9 (67)
Cheyenne
$22.9 (40)
Clark
$0.3 (85)
Clay
0
Cloud
$20.2 (44)
Coffey
$25.3 (36)
Comanche
$35.5 (25)
Cowley
$2.2 (78)
Crawford
$21.5 (43)
Decatur
$0.6 (82)
Dickinson
0
Doniphan
$3.6 (72)
Douglas
$12.2 (54)
Edwards
$5.4 (68)
Elk
$264.3 (1)
Ellis
$20.2 (45)
Ellsworth
$124 (8)
Finney
$34.8 (27)
Ford
$10.3 (60)
Franklin
$0.2 (86)
Geary
$90 (11)
Gove
$117.5 (9)
Graham
$29.3 (33)
Grant
$7.1 (64)
Gray
$13.1 (53)
Greeley
$34.2 (28)
Greenwood
0
Hamilton
$37.4 (23)
Harper
$9.7 (62)
Harvey
$143.8 (7)
Haskell
$37.3 (24)
Hodgeman
$0.05 (89)
Jackson
$1.4 (80)
Jefferson
0
Jewell
$14 (52)
Johnson
$20 (46)
Kearny
$42.7 (20)
Kingman
$24.7 (37)
Kiowa
$0.5 (83)
Labette
$79.8 (13)
Lane
$4.5 (70)
Leavenworth
0
Lincoln
$6.7 (65)
Linn
$75.1 (14)
Logan
$1.5 (79)
Lyon
$11.7 (56)
Marion
0
Marshall
$32.6 (29)
Mcpherson
$35.3 (26)
Meade
$11.4 (58)
Miami
0
Mitchell
$11.6 (57)
Montgomery
$5.1 (69)
Morris
$40 (21)
Morton
$3.5 (73)
Nemaha
$2.2 (77)
Neosho
$148.7 (5)
Ness
$25.4 (35)
Norton
$0.1 (87)
Osage
$14.1 (51)
Osborne
0
Ottawa
$19.9 (47)
Pawnee
$24 (38)
Phillips
$0.09 (88)
Pottawatomie
$23.9 (39)
Pratt
$12.2 (55)
Rawlins
$32.2 (30)
Reno
0
Republic
$63 (15)
Rice
$1.2 (81)
Riley
$155.8 (4)
Rooks
$48 (19)
Rush
$158.8 (3)
Russell
$5.9 (66)
Saline
$55.1 (17)
Scott
$10.3 (61)
Sedgwick
$28.2 (34)
Seward
0
Shawnee
$21.7 (42)
Sheridan
$0.4 (84)
Sherman
0
Smith
$101.7 (10)
Stafford
$30.9 (31)
Stanton
$52.3 (18)
Stevens
$30.2 (32)
Sumner
$21.9 (41)
Thomas
$55.4 (16)
Trego
$3.1 (74)
Wabaunsee
$8.1 (63)
Wallace
0
Washington
$3 (75)
Wichita
$11.4 (59)
Wilson
$38 (22)
Woodson
0
Wyandotte
Map 7
County-by-County Value of Oil Production (and Rank) in 2011, $Millions
$1.2 (36)
Allen
0
Anderson
0
Atchison
$78 (5)
Barber
$1 (38)
Barton
$0.05 (52)
Bourbon
0
Brown
0
Butler
$0.6 (41)
Chase
$1.9 (31)
Chautauqua
0
Cherokee
$16.3 (18)
Cheyenne
$9.6 (21)
Clark
0
Clay
0
Cloud
$0 (50)
Coffey
$18 (17)
Comanche
$0.2 (45)
Cowley
$0.03 (54)
Crawford
0
Decatur
0
Dickinson
0
Doniphan
0
Douglas
$5.7 (24)
Edwards
$0 (51)
Elk
0
Ellis
$1 (37)
Ellsworth
$69.8 (7)
Finney
$9.2 (22)
Ford
0
Franklin
0
Geary
0
Gove
0
Graham
$116.5 (2)
Grant
$1 (39)
Gray
$8 (23)
Greeley
0
Greenwood
$21.1 (14)
Hamilton
$18.3 (16)
Harper
$1.3 (35)
Harvey
$80.5 (4)
Haskell
0
Hodgeman
0
Jackson
0
Jefferson
0
Jewell
$0.1 (49)
Johnson
$102.7 (3)
Kearny
$26 (13)
Kingman
$10.4 (20)
Kiowa
$16.2 (19)
Labette
0
Lane
$0.2 (47)
Leavenworth
0
Lincoln
0
Linn
0
Logan
0
Lyon
$1.4 (34)
Marion
0
Marshall
$0.5 (43)
Mcpherson
$19.2 (15)
Meade
$0.5 (42)
Miami
0
Mitchell
$41.4 (11)
Montgomery
0
Morris
$71.3 (6)
Morton
0
Nemaha
$43.1 (9)
Neosho
0
Ness
0
Norton
0
Osage
0
Osborne
0
Ottawa
$2.8 (27)
Pawnee
0
Phillips
0
Pottawatomie
$3.8 (26)
Pratt
0
Rawlins
$2.6 (28)
Reno
0
Republic
$2.3 (29)
Rice
0
Riley
0
Rooks
$0.7 (40)
Rush
0
Russell
0
Saline
$1.5 (33)
Scott
$0.04 (53)
Sedgwick
$54.4 (8)
Seward
0
Shawnee
0
Sheridan
$4.1 (25)
Sherman
0
Smith
$1.8 (32)
Stafford
$42.9 (10)
Stanton
$158.8 (1)
Stevens
$2.3 (30)
Sumner
0
Thomas
0
Trego
0
Wabaunsee
$0.2 (48)
Wallace
0
Washington
$0.2 (46)
Wichita
$40.7 (12)
Wilson
$0.3 (44)
Woodson
0
Wyandotte
Key
$0.0 to $1.0
$1.0 to $25.0
$25.0 to $50.0
More than $50.0
Map 8
County-by-County Value of Gas Production (and Rank) in 2011, $Millions
Source: Kansas Geological Survey; Independent Oil & Gas Services (Red Top News)
66
would change the Kansas rank among the listed states
to 10th from 15th.
Map 7 and Map 8 report the county-by-county distribu-
tion of oil and gas value for the 2011 production year.
Note from Map 8 the prominence of gas production
from the Cherokee Basin coalbeds in the southeast. (See
Tables B8, B9, B10, and B11 in Appendix B for historical
data on county-level oil and gas production.)
THE OVERALL OIL AND GAS VALUE CHAIN IN
KANSAS
The upstream sector is a key wealth-creating sector of
the Kansas economy. However, the oil and gas indus-
try represents more to the Kansas economy than just
the contribution of the upstream sector. Exhibit 7
illustrates the broader oil and gas value chain, and docu-
ments the average annual economic contribution to the
Kansas economy made by each component. Oil and gas
resources form the foundation for many products and
service businesses. In turn, the jobs and correspond-
ing income derived from the production of products
and service made possible by oil and gas helps support
a broad array of economic opportunities across many
dozens of non-oil-and-gas-related industry sectors in
the state of Kansas.
This report defnes the upstream sector as: development
of oil and gas feld properties (extraction), specialists in
the drilling of oil and gas wells, all non-drilling support
activities associated with the stewardship of safe and
productive oil and gas properties, the construction of
oil and gas pipelines, and the transportation by pipeline
of oil and gas. The categories correspond to specifc
industry codes used by the government to track eco-
nomic activity. The employment count includes owners
77
Oil & Gas
Extraction
Jobs: 8,954
Payroll: $681.7
Indirect Jobs:
12,108
Indirect Payroll:
$445.9
Taxes: $419.6
Oil & Gas
Well Drilling
Specialists
Jobs: 1,322
Payroll: $70.9
Indirect Jobs: 1,530
Indirect Payroll: $62.7
Taxes: $14.9
Non-Drilling
Oil & Gas
Support
Services
Jobs: 3,478
Payroll: $187.7
Indirect Jobs: 4,223
Indirect Payroll: $167.6
Taxes: $37.5
Pipelines Trucking (V.C. Related) Railroads (V.C. Related)
Petroleum
Refining
Jobs: 1,519
Payroll: $139.4
Indirect Jobs: 16,318
Indirect Payroll: $878.1
Taxes: $115.2
Pipeline
Construction
Jobs: 1,160
Payroll: $76.7
Indirect Jobs: 863
Indirect Payroll: $50.9
Taxes: $12.6
Lubricants
Manufacturing
Jobs: 199
Payroll: $14.9
Indirect Jobs: 1,359
Indirect Payroll: $50.7
Taxes: $7.8
Asphalt-Based
Products
Manufacturing
Jobs: 461
Payroll: $27.3
Indirect Jobs: 2,202
Indirect Payroll: $78.0
Taxes: $12.5
Natural Gas
Distribution
Jobs: 1,807
Payroll: $144.2
Indirect Jobs: 2,347
Indirect Payroll: $81.9
Taxes: $22.7
Industrial Gas &
Nitrogen Fertilizer
Manufacturing
Jobs: 420
Payroll: $32.6
Indirect Jobs: 2,073
Indirect Payroll: $92.6
Taxes: $11.4
Gas-Powered
Electricity
Jobs: 272
Payroll: 27.4
Indirect Jobs: 334
Indirect Payroll: $20.1
Taxes: $5.4
Fuel
Dealers
Jobs: 800
Payroll: $43.1
Indirect Jobs: 101
Indirect Payroll: $5.6
Taxes: $4.8
Gasoline
Stations
Jobs: 11,248
Payroll: $253.9
Indirect Jobs: 4,056
Indirect Payroll: $139.8
Taxes: $495.0
Industrial,
Commercial,
Household
Consumers
Jobs: 1,340
Payroll: $135.5
Indirect Jobs: 2,915
Indirect Payroll: $122.3
Taxes: $26.0
Jobs: 17,609
Payroll: $1,052.8
Indirect Jobs: 14,196
Indirect Payroll: $634.9
Taxes: $214.2
Jobs: 403
Payroll: $49.8
Indirect Jobs: 622
Indirect Payroll: $31.8
Taxes: $39.3
Petroleum
Merchant
Wholesalers
Jobs: 1,621
Payroll: $112.1
Indirect Jobs: 1,524
Indirect Payroll: $60.4
Taxes: $17.2
Exhibit 7: A Representation of the Oil and Gas Value Chain for the State of Kansas
(Average Annual Economic Contribution from 1998 to 2010; Millions of 2010 Dollars)
Exhibit 7
A Representation of the Oil and Gas Value Chain for the State of Kansas
(Average Annual Economic Contribution from 1998 to 2010; Millions of 2010 Dollars)
67
of non-employee businesses—the inclusion of which
makes a signifcant contribution to the overall count.
This report defnes the downstream sector as any busi-
ness sector in the value chain that is not part of the
upstream sector. Some analyses distinguish among the
upstream, midstream, and downstream, and, unlike this
report, typically put pipeline and certain other transpor-
tation activity in the “midstream” sector. Table B12 in
Appendix B provides more detail about the classifca-
tions and the associated jobs and payroll data.
Exhibit 8 provides a map of Kansas pipelines and refn-
ery locations.
Each component of Exhibit 7 lists fve items: Jobs,
Payroll, Indirect Jobs, Indirect Payroll, and Taxes. The
reported measures of these items constitute the annual
average levels from 1998 through 2010. The year
1998 marked a low point for oil prices and, coinciden-
tally, marks the year of a major change in the way the
government classifes industry sectors. Items reported
in dollars have been adjusted for infation, with 2010 as
the base year. Descriptions and summary charts related
to the fve different components in each box of Exhibit
7 follow.
The Jobs and Payroll items refect actual industry data
collected by the U.S. Bureau of Labor Statistics and the
U.S. Census Bureau. The Center for Applied Econom-
ics at the KU School of Business made special estima-
tions or data collection efforts in cases where data gaps
appeared or unique parts of an industry component
required a special focus.
Chart 34 and Chart 35 summarize the jobs and payroll
data from Exhibit 7. These represent the jobs and
payroll directly related to each of the specifc business
categories in the upstream and downstream sectors. The
Jobs and Payroll data have two components: businesses
with employees and businesses without employees. The
payroll estimated for the businesses with employees
D
D
D
McPherson Refinery
El Dorado Refinery
Coffeyville Refinery
Kansas Refineries with Pipelines
0 25 50 75 100 12.5
Miles
¯
D
Refinery
Oil or Gas Pipeline
29 August 2012
Exhibit 8
Kansas Refneries and Pipelines
68
$596.6
$1,523.5
$513.7
$416.1
$0
$500
$1,000
$1,500
$2,000
$2,500
Upstream Payroll Downstream Payroll
M
i
l
l
i
o
n
s
o
f
2
0
1
0
D
o
l
l
a
r
s
Employer Businesses Non-Employer Businesses
$1,110.3
$1,939.6
Chart 35
Avg. Annual Direct Payroll, Upstream & Downstream, 1998-2010
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau; Center for Applied Economics, KU School of Business
9,253
32,774
6,536
4,053
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Upstream Jobs Downstream Jobs
Employer Businesses Non-Employer Businesses
15,789
36,827
Chart 34
Avg. Annual Direct Jobs, Upstream & Downstream, 1998-2010
69
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Manufacturing
Informaton
Government
Constructon
Agriculture & Natural Resources
Other Services
Leisure & Hospitality
Finance and Real Estate
Educaton & Health Services
Professional & Business Services
Trade, Transportaton & Utlites
Upstream Indirect Upstream Induced Downstream Indirect Downstream Induced
4,918
2,427
2,416
1,606
1,045
736
9,537
7,434
Total = 17,546
6,488
11,802
Chart 37
Avg. Annual Indirect and Induced Jobs by Sector, Upstream & Downstream, 1998-2010
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau; IMPLAN; Center for Applied Economics, KU School of Business
6,536
712
938
1,722
2,611
1,107
1,538
457
168
4,053
2,756
5,333
7,021
5,490
3,363
4,603
2,363
1,845
0
2,000
4,000
6,000
8,000
10,000
12,000
Upstream Downstream
8,101
4,470
6,141
2,820
2,022
6,271
8,743
3,468
10,589
Chart 36
Avg. Annual Direct Jobs by Business Establishment Job Count, Upstream & Downstream, 1998-2010
70
includes estimates for fringe benefts, since that is a major
form of compensation. For the businesses without
employees, each business in a respective component of
the value chain counts as one job and the receipts of the
business count as “payroll.” Non-employee businesses
play a signifcant role in the upstream segment of the
industry: many of these businesses constitute the lessors
and royalty owners of the land and mineral rights. (The
items for Trucking and Railroads represent estimates
to account for the number of jobs and related payroll
specifcally interacting with the oil and gas value chain,
as represented in Exhibit 7.)
Chart 36 provides job estimates based on the size of the
business establishments involved. From a data presenta-
tion perspective, “establishments” differ from “frms.”
A large frm with thousands of employees may operate
a branch offce or production facility. Government
statisticians treat the branch as an establishment. That
said, most of the establishments represented by the data
in Chart 36 probably also qualify as stand-alone frms.
The Indirect Jobs and Indirect Payroll items in Exhibit
7 refect estimates made by using input-output analysis,
a traditional approach for conducting economic impact
evaluations. Input-output analysis uses the historical
pattern of industry-to-industry interactions to assess
how economic activity in one sector spills over to other
sectors.
The input-output analysis represented in Exhibit 7
relied on the databases and software developed by the
Minnesota IMPLAN Group, Inc. (www.implan.com).
IMPLAN is an industry standard because of the work
the frm does to make the data as current as possible.
IMPLAN generates two types of information in
response to economic impact investigations: (1) indirect
effects and (2) induced effects. Indirect effects measure
the economic activity related to the direct interaction
of one industry segment with another—for example,
the jobs and related payroll specifcally associated with
a business in the Oil & Gas Extraction sector hiring the
services of a frm in the Drilling sector. Induced effects,
$28.7
$109.0
$38.4
$189.6
$53.7
$83.1
$70.0
$87.3
$136.6
$212.5
$447.6
$0 $50 $100 $150 $200 $250 $300 $350 $400 $450
Other
Severance Tax
Residental Property Tax
Oil & Gas Property Tax
Personal Income Tax
Sales Tax
Motor Fuels
Upstream Downstream
Chart 38
Avg. Annual State and Local Taxes by Type Supported by the Upstream & Downstream Sectors, 1998-
2010, Millions 2010$
Source: U.S. Bureau of Labor Statistics; U.S. Census Bureau; IMPLAN; Center for Applied Economics, KU School of Business
71
in turn, measure the economic activity made possible by
the income earned by personnel in each of the sectors—
for example, the array of jobs supported by the income
spent by the families supported by jobs in the Oil &
Gas Extraction sector and the Drilling sector, like food,
clothing, housing, transportation, and entertainment.
Chart 37 provides a summary of the estimates, by sector,
for the indirect and induced jobs created by the upstream
and downstream business sectors. For convenience, the
“Indirect Jobs” and “Indirect Payroll” items listed in the
components of Exhibit 7 add together the indirect and
induced effects generated by the IMPLAN input-output
calculations. The IMPLAN analysis relies for its results
on the actual jobs and payroll data presented in Table
B12 of Appendix B.
The Taxes item in Exhibit 7 refects a large subset of
state- and local-level taxes. The estimates exclude only
two major categories of taxation: (1) corporate income
taxes and (2) commercial property taxes paid by busi-
nesses that do not face an explicit property tax levied
on lands with oil and gas resources. Corporate income
taxes and commercial property taxes—especially those
on many of the downstream businesses sectors—are
substantial omissions. However, there is no credible
way to make estimates of these taxes without having
widespread access to proprietary data.
Chart 38 summarizes the major taxes used in Exhibit 7.
Table B13 in Appendix B provides a more detailed list
of the taxes and Table B14 provides county-by-county
data on oil and gas related property taxes. With two
exceptions, each category of tax is estimated separately
based on the job count and take-home pay associated
with each upstream and downstream sector. Severance
Tax and Oil and Gas Property Tax are allocated to the Oil
and Gas Extraction sector. Motor Fuels Tax is allocated
to the Gasoline Stations sector.
A PRIMER ON THE KANSAS SEVERANCE TAX
(K.S.A 79-4217)
• Enacted in 1983. (The Kansas Supreme Court
ruled as invalid a 1957 version of a severance
tax.)
• The tax is levied on the gross value of oil and
gas at the time it is severed from the earth.
• The statutory tax rate equals eight percent. (A
property tax credit of 3.67 percent, per K.S.A.
79-4219, makes the effective severance tax rate
equal to 4.33 percent.)
• Seven percent of the severance tax is dedicated
to a Special County Mineral Production Tax
fund for counties and school districts in produc-
ing areas. The remaining 93 percent of the tax
is dedicated to the State General Fund.
Exemptions for Oil Wells:
• Oil wells of 2,000 feet or less that produce 5
barrels per day or less.
• Oil wells deeper than 2,000 feet, are allowed
exemptions according to the following schedule:
Price per Barrel Normal Exemption Water-Flood Exemption
More than $16.00 6 barrels/day or less 7 barrels/day or less
$15.01 to $16.00 67barrels/day or less 8 barrels/day or less
$14.01 to $15.00 8 barrels/day or less 9 barrels/day or less
$13.01 to $14.00 9 barrels/day or less 10 barrels/day or less
$13.00 or less 10 barrels/day or less 10 barrels/day or less
• All oil production from tertiary recovery
processes.
• All new pools discovered are exempt for the frst
two years, unless (as of July 1, 2012) the new
pool produces more than 50 barrels per day.
• All oil production from (certifed) 3-year inactive
wells for 10 years from the date of certifcation.
• All incremental oil produced from a “produc-
tion enhancement project” for 7 years following
the project start date.
Exemptions for Gas Wells:
• Gas wells that have an average daily production
value of less than $87.
• Gas used for the aid of gas production.
• Gas used for domestic or agricultural purposes.
• Prior to July 1, 2012, gas from a new pool for a
period of two years.
72
• All gas production from (certified) 3-year
inactive wells for 10 years from the date of
certifcation.
• All incremental gas produced from a “produc-
tion enhancement project” for 7 years following
the project start date.
A PRIMER ON KANSAS AD VALOREM TAXATION
OF OIL AND GAS PROPERTY
• The Kansas Constitution (Article 11) classifes
oil and gas leases (and all associated improve-
ments represented by a well and production
equipment) as tangible personal property.
• Like a home or business, appraisers estimated
a market value for a lease. The market value is
then assessed at 25 percent of market value for
oil leases that produce 5 barrels a day or less
and gas leases that produce 100,000 cubic feet
per day or less. Leases that produce more than
these thresholds are assessed at 30 percent of
appraised market value.
• Like a home or a business, the assessed value
of an oil or gas property are subject to the
property tax rates levied by all relevant jurisdic-
tions (e.g., city, county, school district, special
district, state).
• The appraised valuation of an oil or gas prop-
erty follows a multi-step process:
• The Kansas Department of Revenue’s Divi-
sion of Property Valuation annually sets the
price of oil for assessment purposes. It
also sets the price of natural gas (through a
process more complicated than that for oil).
During the annual price-setting process, the
Division of Property Valuation invites and
considers input from outside parties like
county appraisers, industry associations,
and other interested parties. The Division
uses standardized formulas to determine
a decline rate for the underground oil and
gas reserves associated with a well because
these reserves (in addition to the well and
the production equipment) create the tax
base: the tax applies to the value of oil or
gas in the ground.
• Once the Division of Property Valuation
sets a price for oil and gas to use for the
prospective tax year, it applied that price
to a well’s production rate less the expenses
incurred for that production. The net
fgure determines an income level for the
production.
• The income calculation, in turn, determines
the value of the oil or gas resources in the
ground. The property tax rate (millage rate)
levied by each taxing jurisdiction applies to
the calculated value.
• K.S.A. 79-201t exempts from property or ad
valorem taxes: “All oil leases, other than royalty
interests therein, the average daily production
from which is three barrels or less per producing
well, or fve barrels or less per producing well
which has a completion depth of 2,000 feet or
more.” This law took effect in the 1998 tax year.
73
Appendix A:
Technical Details of
Mississippian Lime Simulation
Model and Economic Impact
Estimates
The representative well forms the foundation for the
simulation model related to the potential economic
impact of the Mississippian Lime play. The represen-
tative well helps defne the workforce required to drill
and complete it, as well as defning a realistic production
profle to establish production-related income streams.
Data developed and reported for investors by Sandridge
Energy (February 2012), one of the prominent lease-
holders involved in the Mississippian Lime play, provided
the empirical basis for the representative well depicted
in Chart A1. The frst 600 days closely conforms to the
average experience Sandridge reports for its horizontal
Mississippian wells in Oklahoma and Kansas. Sandridge
offered 10-year present value estimates to its potential
investors, so the simulation uses the 10-year time frame
0
50
100
150
200
250
300
1 366 731 1,096 1,461 1,826 2,191 2,556 2,921 3,286
P
r
o
d
u
c
t
o
n
:
B
a
r
r
e
l
s
o
f
O
i
l
E
q
u
i
v
a
l
e
n
t
p
e
r
D
a
y
Number of Days
Chart A1
Production Profle of a Representative Horizontal Well
Related to the Mississippian Lime Play
Source: Sandridge Energy, Public Presentation; Center for Applied Economics, KU School of Business
to deplete the representative well. The decline pattern in
Chart A1 implies a well that will produce about 324,000
barrels of oil equivalent. Public statements by Sandridge
Energy offcials indicate that the average well produces
about 55 percent oil and 45 percent natural gas.
The economic impact estimates rely on the IMPLAN
input-output model (as described in the text of this
report related to the contribution of the oil and gas
industry to the Kansas economy). The inputs into the
IMPLAN model are:
• The number of workers required to drill and
complete a well;
• The number of construction-related workers
required to support a well;
• The transportation-related workers required to
support a well and its subsequent production
volumes;
74
• The per diem per worker spent in the hotel
and restaurant sectors by out-of-state (visiting)
workers;
• The income (defned as “proprietor” income)
generated as production royalties.
These inputs into the IMPLAN model generate “indi-
rect” job counts, “induced” job counts, labor income
derived from the job counts, and proprietor income
implied by the business activity supporting the job
counts.
Table A1
Estimated Potential Well Count by County, Select
Scenarios
Max
Square Wells Wells if Wells if
Miles @ 3 per 10% 18%
County (Sections) Section of Max of Max
Barber 1,134.1 3,402 340 612
Cheyenne 1,019.9 3,060 306 551
Clark 974.6 2,924 292 526
Comanche 788.3 2,365 236 426
Cowley 1,125.8 3,377 338 608
Edwards 621.9 1,866 187 336
Finney 1,302.0 3,906 391 703
Ford 1,098.3 3,295 329 593
Gove 1,071.7 3,215 322 579
Gray 868.9 2,607 261 469
Harper 801.3 2,404 240 433
Haskell 577.5 1,733 173 312
Hodgeman 860.0 2,580 258 464
Kingman 863.4 2,590 259 466
Kiowa 722.6 2,168 217 390
Lane 717.5 2,152 215 387
Logan 1,073.0 3,219 322 579
Meade 978.1 2,934 293 528
Ness 1,074.8 3,224 322 580
Pawnee 754.3 2,263 226 407
Pratt 735.1 2,205 221 397
Rawlins 1,069.4 3,208 321 577
Reno 1,255.4 3,766 377 678
Rush 717.8 2,153 215 388
Scott 717.5 2,153 215 387
Sedgwick 997.5 2,993 299 539
Sherman 1,056.1 3,168 317 570
Sumner 1,181.9 3,546 355 638
Thomas 1,074.7 3,224 322 580
Trego 889.5 2,668 267 480
Wallace 913.7 2,741 274 493
Wichita 718.6 2,156 216 388
The discussion in the simulation scenarios references
a projected total number of possible horizontal wells
implied by the geography identifed in Map 2 of the
report. The simulation does not incorporate this projec-
tion except to understand scenarios that might exceed the
projected maximum number of wells. To generate this
projection, industry representatives suggested using the
Barnett Shale geography and geology as an analog for
the Kansas Mississippian Lime. The counties roughly
defning the area of the Barnett Shale depicted in Exhibit
A1 comprise about 26,000 square miles. The “core”
area, colored in green, comprises about 2,650 square
miles (or 10 percent of the total). The core area plus
the pink-colored area comprises about 4,700 square miles
(or about 18 percent of the total).
Exhibit A1
Texas Counties that Help Defne the Geography
of the Barnett Shale
Source: http://www.worldoil.com/SHALE-ENERGY-Developing-
the-Barnett-Barnett-activity-continuing-despite-environmental-
tensions.html
The Kansas Mississippian Lime region depicted by the
county geography in Map 2 comprises 29,755 square
miles. Applying the Barnett Shale ratios to this area
implies a “productive” region of between 2,975 and
5,356 square miles.
The Barnett Shale region supports about three hori-
zontal wells per square mile (defned as a “section” by
the oil industry). Using this well count in the Kansas
Mississippian Lime context implies a projected range
of 8,925 to 16,068 potential wells. Table A1 provides
estimates of potential well count by county. Based on
the Barnett Shale-related assumptions, some counties
could conceivably experience the estimated maximum
count. All counties combined cannot.
75
Appendix B
Supplementary Data Tables
Well Avg Max
Count Depth Depth
Allen 12,044 846 5,168
Anderson 7,412 816 4,700
Atchison 125 1,984 3,136
Barber 6,628 4,659 9,342
Barton 15,732 3,414 5,090
Bourbon 3,239 626 6,428
Brown 78 3,087 5,772
Butler 13,850 2,351 6,841
Chase 1,110 1,516 4,625
Chautauqua 8,606 1,410 5,502
Cherokee 244 536 1,470
Cheyenne 1,108 2,552 5,803
Clark 1,924 5,515 8,060
Clay 114 2,189 3,664
Cloud 27 3,165 4,046
Coffey 3,086 1,347 4,222
Comanche 1,953 5,430 4,775
Cowley 10,227 2,916 4,573
Crawford 2,660 357 3,097
Decatur 1,718 3,770 5,033
Dickinson 505 2,540 3,550
Doniphan 42 1,968 3,400
Douglas 1,411 857 2,996
Edwards 2,290 4,494 6,070
Elk 3,148 1,593 4,133
Ellis 14,147 3,600 4,858
Ellsworth 3,387 3,228 5,360
Finney 3,542 3,909 7,044
Ford 977 5,013 6,752
Franklin 5,511 732 6,195
Geary 108 2,283 3,638
Gove 2,334 4,368 5,169
Graham 8,148 3,868 5,052
Grant 2,576 3,384 8,000
Gray 421 5,036 7,350
Greeley 900 4,017 5,994
Greenwood 11,233 2,024 5,684
Hamilton 1,157 3,030 6,690
Harper 2,792 4,557 9,060
Harvey 2,026 3,265 4,548
Haskell 3,292 4,505 7,650
Hodgeman 2,521 4,512 6,856
Jackson 138 3,078 3,992
Jefferson 782 1,622 3,615
Jewell 18 3,818 4,437
Johnson 3,428 847 5,370
Kearny 2,749 3,269 7,534
Kingman 4,532 4,172 5,975
Kiowa 2,551 4,829 9,069
Labette 4,022 721 6,250
Lane 2,628 4,558 5,700
Leavenworth 1,291 1,357 3,500
Lincoln 53 3,230 4,306
Linn 4,580 547 2,100
Logan 1,180 4,655 5,756
Well Avg Max
Count Depth Depth
Lyon 967 2,331 3,484
McPherson 5,504 3,130 6,955
Marion 4,419 2,577 4,613
Marshall 67 1,865 3,973
Meade 2,192 5,720 8,480
Miami 8,344 545 2,740
Mitchell 36 3,860 4,675
Montgomery 14,560 950 4,625
Morris 930 2,110 4,300
Morton 3,655 4,240 7,395
Nemaha 291 3,322 4,183
Neosho 10,132 767 8,270
Ness 6,651 4,397 6,795
Norton 1,219 3,675 4,560
Osage 108 1,880 3,808
Osborne 575 3,520 4,860
Ottawa 28 3,442 4,453
Pawnee 3,307 4,019 5,365
Phillips 1,844 3,485 4,152
Pottawatomie 126 2,437 3,790
Pratt 4,525 4,329 6,709
Rawlins 1,284 4,359 5,361
Reno 3,732 3,671 5,008
Republic 5 3,186 3,565
Rice 9,283 3,320 5,327
Riley 185 1,861 4,440
Rooks 9,037 3,539 5,860
Rush 3,086 3,780 4,802
Russell 12,027 3,164 4,209
Saline 1,488 3,055 5,433
Scott 1,138 4,449 6,432
Sedgwick 4,115 3,273 4,750
Seward 3,419 5,268 9,050
Shawnee 30 2,329 3,329
Sheridan 1,871 4,044 5,001
Sherman 477 2,530 5,913
Smith 34 3,622 4,800
Stafford 10,192 3,845 5,330
Stanton 1,653 4,119 7,507
Stevens 4,020 4,232 8,714
Sumner 6,202 3,567 6,651
Thomas 967 4,618 5,720
Trego 4,349 4,021 5,145
Wabaunsee 539 2,888 3,753
Wallace 433 4,794 6,058
Washington 22 3,270 11,300
Wichita 219 4,672 6,321
Wilson 7,898 1,036 3,352
Woodson 8,599 1,225 8,376
Wyandotte 96 588 1,428
Table B1
County-by-County Well Count, Average Well Depth, and Maximum Well Depth
Source: Kansas Geological Survey
76
Table B2
Total Wells Drilled by State (2005-2009)
Wells Drilled--Oil Wells Drilled--Gas Wells Drilled--Dry Hole
Exploratory Development Total Exploratory Development Total Exploratory Development Total
United States 3,852 59,484 63,336 10,098 124,835 134,933 6,609 14,604 21,214
Federal Offshore 20 614 634 100 1,034 1,134 551 488 1,039
Alabama 38 48 86 34 1,759 1,793 122 73 195
Alaska 5 620 625 10 67 77 48 26 74
Arizona - - - - - - 3 1 4
Arkansas 7 251 258 423 2,901 3,324 98 168 266
California 20 10,324 10,344 26 587 613 114 301 415
Colorado 19 287 306 375 13,572 13,947 215 368 583
Florida - 1 1 - - - - 1 1
Illinois 50 1,093 1,143 2 181 183 258 433 691
Indiana 36 254 290 86 124 210 139 126 265
Kansas 817 5,255 6,072 225 4,974 5,199 1,265 2,437 3,702
Kentucky 129 804 933 1,321 2,165 3,486 366 857 1,223
Louisiana 12 1,307 1,319 73 4,638 4,711 206 1,229 1,435
Maryland - - - - - - - - -
Michigan 40 157 197 23 1,707 1,730 106 157 263
Mississippi 10 338 348 33 639 672 133 178 311
Montana 483 733 1,216 235 1,799 2,034 168 143 311
Nebraska 30 74 104 32 229 261 116 107 223
Nevada - 1 1 - - - 13 1 14
New Mexico 118 2,844 2,962 167 4,884 5,051 124 268 392
New York 19 500 519 143 596 739 63 38 101
North Dakota 711 1,569 2,280 9 101 110 91 71 162
Ohio 64 1,205 1,269 268 1,894 2,162 57 158 215
Oklahoma 366 4,121 4,487 1,347 9,400 10,747 432 1,346 1,778
Oregon - - - - 4 4 - 1 1
Pennsylvania 338 4,144 4,482 2,582 10,517 13,099 61 202 263
South Dakota 10 83 93 11 20 31 25 4 29
Tennessee 15 138 153 306 183 489 41 235 276
Texas 339 20,978 21,325 892 35,352 36,244 1,907 5,080 6,987
Utah 94 1,312 1,406 197 2,601 2,798 95 111 206
Virginia - - - 81 2,689 2,770 - - -
West Virginia 9 147 156 964 6,448 7,412 24 69 93
Wyoming 63 732 795 206 14,467 14,673 175 301 476
Source: IHS Energy; Independent Petroleum Association of America
77
Table B3
Total Footage Drilled by State (2005-2009)
Footage Drilled--Oil Footage Drilled--Gas Footage Drilled--Dry Hole
(thousand feet) (thousand feet) (thous feet)
Exploratory Development Total Exploratory Development Total Exploratory Development Total
United States 27,496 274,710 302,206 60,163 815,630 875,793 39,265 71,532 110,796
Federal Offshore 293 6,706 6,999 913 10,467 11,379 6,849 4,256 11,105
Alabama 435 547 982 168 4,281 4,449 1,108 269 1,377
Alaska 57 3,814 3,871 88 567 654 313 163 475
Arizona - - - - - - 15 1 16
Arkansas 41 986 1,027 2,812 20,613 23,425 584 945 1,529
California 89 24,073 24,162 141 3,807 3,948 771 1,496 2,266
Colorado 117 1,886 2,003 2,072 88,333 90,404 976 1,662 2,599
Florida - 3 3 - - - - 1 1
Illinois 143 2,695 2,837 4 172 176 664 1,018 1,682
Indiana 86 462 548 195 158 353 271 214 485
Kansas 3,423 15,302 18,724 959 9,284 10,243 5,357 8,934 14,290
Kentucky 214 1,210 1,425 4,531 8,309 12,840 564 2,282 1,846
Louisiana 91 6,883 6,974 652 48,590 49,242 1,730 10,199 11,928
Maryland - - - - - - - - -
Michigan 193 631 825 126 2,824 2,950 407 421 829
Mississippi 103 2,619 2,721 198 5,342 5,540 1,108 1,453 2,561
Montana 5,288 6,814 12,102 529 2,811 3,340 802 410 1,213
Nebraska 133 362 495 98 576 675 523 461 984
Nevada - 5 5 - - - 72 6 78
New Mexico 554 17,698 18,252 1,262 28,675 29,937 673 1,554 2,227
New York 37 813 850 838 1,868 2,706 480 140 619
North Dakota 9,053 18,699 27,752 104 289 393 806 547 1,353
Ohio 249 4,745 4,994 1,112 7,222 8,334 211 609 821
Oklahoma 2,806 20,548 23,354 13,078 68,927 82,005 2,844 6,822 9,667
Oregon - - - - 12 12 - 2 2
Pennsylvania 705 7,434 8,138 12,250 41,417 53,667 232 584 816
South Dakota 87 504 591 23 35 57 55 29 83
Tennessee 35 222 257 1,260 660 1,920 79 394 473
Texas 2,297 121,471 123,768 8,188 344,768 352,956 14,694 29,002 43,696
Utah 664 8,214 8,878 1,714 22,327 24,041 662 346 1,008
Virginia 11 1,077 1,088 443 6,343 6,787 11 1,077 1,088
West Virginia 35 469 504 4,809 28,818 33,626 90 154 244
Wyoming 545 3,763 4,308 2,238 64,117 66,355 1,312 1,233 2,545
Source: IHS Energy; Independent Petroleum Association of America
78
Table B4
Average Cost per Foot Drilled; Average Cost per Well Drilled; and Total Cost of Drilling (2005-2009)
Cost of Drilling--Oil Cost of Drilling--Gas Cost of Drilling--Dry Hole
Total Cost Total Cost Total Cost
Cost/ft Cost/well (Thous$) Cost/ft Cost/well (Thous$) Cost/ft Cost/well (Thous$)
United States 419 2,009,323 128,775,385 477 3,232,661 413,141,606 424 2,195,226 43,844,218
Federal Offshore 4,288 47,112,743 27,626,444 4,524 44,777,715 40,923,378 4,093 41,910,020 40,705,520
Alabama 630 7,152,018 606,975 374 906,622 1,543,229 438 3,635,221 651,415
Alaska 3,884 24,093,765 14,432,679 2,392 18,902,859 1,416,550 3,279 21,590,133 1,554,075
Arizona - - - - - - 96 413,979 504,799
Arkansas 217 878,072 240,840 220 1,471,043 5,376,979 225 1,290,154 313,116
California 559 1,293,827 13,128,701 286 1,825,783 1,078,859 449 2,411,882 917,879
Colorado 348 2,286,894 803,604 560 3,823,343 47,278,190 308 1,389,780 638,637
Florida 607 1,844,078 9,220 - - - 402 443,879 2,219
Illinois 258 642,572 733,081 617 568,628 99,399 229 556,511 369,711
Indiana 261 486,032 156,981 776 1,688,308 334,921 283 516,811 139,335
Kansas 128 392,655 2,564,956 196 404,222 1,857,680 78 302,586 1,126,242
Kentucky 244 379,661 356,691 177 714,606 2,227,990 279 421,669 568,339
Louisiana 816 4,483,667 6,192,323 663 7,184,973 34,183,741 824 6,594,087 9,624,997
Maryland - - - - - - - - -
Michigan 583 2,400,493 513,491 693 1,260,323 1,918,863 427 1,389,546 325,554
Mississippi 564 4,310,296 1,626,952 684 6,335,002 3,238,746 564 4,860,291 1,418,552
Montana 530 5,008,041 5,576,520 356 609,663 1,139,712 519 2,123,228 593,690
Nebraska 304 1,475,997 161,844 327 902,035 237,813 300 1,460,512 288,419
Nevada 60 299,380 1,497 - - - 246 1,404,423 18,835
New Mexico 322 2,003,778 5,978,242 314 1,968,100 8,143,401 444 2,498,058 910,709
New York 223 355,536 188,509 236 900,916 614,126 432 2,713,979 265,732
North Dakota 571 6,950,072 17,994,897 980 6,224,508 274,114 471 4,035,444 610,704
Ohio 147 519,163 544,357 152 582,295 1,350,538 276 1,021,445 211,060
Oklahoma 272 1,419,833 6,720,967 407 3,318,881 31,681,369 279 1,455,099 2,380,510
Oregon - - - 230 694,330 7,847 85 188,845 944
Pennsylvania 213 383,788 1,789,771 213 973,165 10,692,170 330 921,055 125,888
South Dakota 530 3,637,975 313,524 490 790,788 29,584 376 1,347,888 33,998
Tennessee 256 396,305 50,536 159 637,024 295,765 273 448,928 109,616
Texas 322 1,894,661 42,024,011 500 4,969,537 175,377,913 388 2,441,203 16,000,010
Utah 300 1,934,648 2,709,893 712 6,113,567 16,417,083 604 2,991,069 524,663
Virginia - - - 197 582,900 1,601,315 - - -
West Virginia 168 584,580 66,486 179 892,748 5,644,956 258 771,322 63,934
Wyoming 515 2,638,014 2,137,931 802 4,120,516 52,491,971 706 3,677,468 1,621,014
Source: IHS Energy; Independent Petroleum Association of America
79
Table B5
Distribution of Drilling and Production Activity among Select “Major” Oil Companies and
Independent Companies
Cummulative Cummulative
Oil Gas Production Share of Share of
Well Share of Production (Thousand Oil Gas
Company Count Wells (Barrels) Cubic Feet) Production Production
Shell 919 0.22% n.a. n.a. n.a. n.a.
BP 289 0.07% 2,503,752 3,427,431,088 0.04% 8.69%
Oxy 2,783 0.67% 443,363,558 4,584,982,258 6.92% 11.62%
Anadarko 2,812 0.67% 13,635,658 2,551,023,293 0.21% 6.47%
Texaco* 1,089 0.26% 1,818,221 65,339,912 0.03% 0.17%
Chevron* 69 0.02% 40,078 103,561,440 0.00% 0.26%
Phillips* 1,840 0.44% n.a. n.a. n.a. n.a.
Conoco* 110 0.03% n.a. n.a. n.a. n.a.
Conoco-Phillips* 25 0.01% n.a. n.a. n.a. n.a.
Exxon-Mobil* 2,369 0.57% 605,067 3,953,598,384 0.01% 10.02%
Independent Producers 404,920 97.05% 5,944,144,189 24,757,128,867 92.79% 62.77%
Kansas Total (as of March 2012) 417,225 6,406,110,523 39,443,065,242
Note: Well count includes all wells throughout Kansas history in which the listed company was recorded as the “original operator.”
* Exxon-Mobil consolidates the pre-merger data because production data for Mobil was unavailable.
Before the merger, Exxon drilled 465 wells and Mobil drilled 1,904. Data for other merged companies are left unconsolidated to provide a
sense of history.
Source: Kansas Geological Survey
80
Table B6
State-by-State Oil Production
Production (Million Barrels) Rank Share of Total (Percent)
1981 1991 2001 2011 1981 1991 2001 2011 1981 1991 2001 2011
Alabama 20.7 18.6 9.3 8.3 17 15 15 15 0.6 0.7 0.4 0.4
Alaska* 615.8 710.9 431.0 219.3 2 1 1 3 19.1 25.3 19.3 10.5
Arizona 0.4 0.1 0.1 0.0 29 30 30 30 0.0 0.0 0.0 0.0
Arkansas 18.4 10.3 7.6 5.9 18 17 16 16 0.6 0.4 0.3 0.3
California** 424.0 374.3 308.7 225.5 3 3 3 2 13.2 13.3 13.9 10.8
Colorado 30.3 31.4 16.5 33.4 14 10 11 10 0.9 1.1 0.7 1.6
Florida 34.8 4.7 4.4 2.0 10 21 19 22 1.1 0.2 0.2 0.1
Illinois 24.1 19.1 10.1 9.3 16 14 14 14 0.7 0.7 0.5 0.4
Indiana 4.7 3.0 2.0 2.0 22 23 22 23 0.1 0.1 0.1 0.1
Kansas 65.8 56.9 33.9 41.9 8 8 8 9 2.0 2.0 1.5 2.0
Kentucky 6.5 5.5 3.0 2.4 21 20 20 20 0.2 0.2 0.1 0.1
Louisiana* 225.8 171.4 117.4 71.8 4 4 4 6 7.0 6.1 5.3 3.4
Michigan 32.7 17.5 7.4 5.1 12 16 17 18 1.0 0.6 0.3 0.2
Mississippi 34.2 27.1 19.5 23.6 11 11 10 12 1.1 1.0 0.9 1.1
Missouri 0.2 0.1 0.1 0.1 30 29 29 29 0.0 0.0 0.0 0.0
Montana 30.8 19.6 15.9 23.6 13 13 12 13 1.0 0.7 0.7 1.1
Nebraska 6.7 5.8 2.9 2.2 20 19 21 21 0.2 0.2 0.1 0.1
Nevada 0.7 3.4 0.6 0.4 28 22 26 26 0.0 0.1 0.0 0.0
New Mexico 71.6 70.4 68.0 70.6 7 7 6 7 2.2 2.5 3.1 3.4
New York 0.8 0.4 0.2 0.4 27 28 28 27 0.0 0.0 0.0 0.0
North Dakota 45.4 35.9 31.7 152.8 9 9 9 4 1.4 1.3 1.4 7.3
Ohio 13.6 9.2 6.1 5.2 19 18 18 17 0.4 0.3 0.3 0.2
Oklahoma 154.1 108.1 68.5 74.5 5 5 5 5 4.8 3.8 3.1 3.6
Pennsylvania 3.7 2.5 1.6 3.7 23 24 23 19 0.1 0.1 0.1 0.2
South Dakota 1.0 1.7 1.3 1.6 25 26 24 25 0.0 0.1 0.1 0.1
Tennessee 0.9 0.5 0.4 0.3 26 27 27 28 0.0 0.0 0.0 0.0
Texas* 934.0 685.1 425.2 521.5 1 2 2 1 29.0 24.4 19.1 24.9
Utah 25.9 24.5 15.3 25.8 15 12 13 11 0.8 0.9 0.7 1.2
Virginia 0.0 0.0 0.0 0.0 31 31 31 31 0.0 0.0 0.0 0.0
West Virginia 3.5 2.0 1.2 1.9 24 25 25 24 0.1 0.1 0.1 0.1
Wyoming 130.6 99.9 57.4 53.3 6 6 7 8 4.0 3.6 2.6 2.5
Total*** 3,224.0 2,811.5 2,227.7 2,096.1
* Includes offshore production
** Includes state and federal offshore production
*** Includes federal Gulf of Mexico offshore production
Source: Energy Information Administration
81
Table B7
State-by-State Natural Gas Marketed Production
Production (Million Cubic Feet) Rank Share of Total (Percent)
1981 1991 2001 2010 1981 1991 2001 2010 1981 1991 2001 2010
Alabama* 79,244 170,847 356,810 222,932 17 12 10 14 0.40 0.92 1.73 1.00
Alaska* 242,564 437,822 471,440 374,226 8 7 8 10 1.22 2.36 2.29 1.67
Arizona 187 1,225 307 183 29 26 29 30 0.00 0.01 0.00 0.00
Arkansas 92,986 164,702 166,804 926,638 15 13 14 7 0.47 0.89 0.81 4.14
California* 380,359 378,384 377,824 286,841 7 8 9 12 1.91 2.04 1.84 1.28
Colorado 195,706 285,961 817,206 1,578,379 9 9 6 5 0.98 1.54 3.97 7.05
Florida 32,470 4,884 5,710 12,409 21 23 23 23 0.16 0.03 0.03 0.06
Illinois 1,295 466 185 1,203 26 29 30 29 0.01 0.00 0.00 0.01
Indiana 330 232 1,064 6,802 28 30 28 24 0.00 0.00 0.01 0.03
Kansas 640,114 628,459 480,145 324,720 5 6 7 11 3.21 3.39 2.33 1.45
Kentuck 61,312 78,904 81,723 135,330 18 18 18 17 0.31 0.43 0.40 0.60
Louisiana* 6,780,184 5,034,361 1,502,086 2,210,099 2 2 4 3 33.98 27.17 7.30 9.87
Maryland 56 29 32 43 30 32 31 31 0.00 0.00 0.00 0.00
Michigan 152,593 195,749 275,036 151,886 12 11 12 15 0.76 1.06 1.34 0.68
Mississippi 181,238 108,031 107,541 73,721 10 17 16 21 0.91 0.58 0.52 0.33
Missouri 0 15 0 0 32 33 33 33 0.00 0.00 0.00 0.00
Montana 56,565 51,999 81,397 87,539 19 20 19 18 0.28 0.28 0.40 0.39
Nebraska 2,519 784 1,208 2,231 24 28 25 26 0.01 0.00 0.01 0.01
Nevada 0 53 7 4 32 31 32 32 0.00 0.00 0.00 0.00
New Mexico 1,132,066 1,038,284 1,689,125 1,292,185 4 4 2 6 5.67 5.60 8.21 5.77
New York 16,074 22,777 27,787 35,813 22 21 22 22 0.08 0.12 0.14 0.16
North Dakota 42,573 53,479 54,732 81,837 20 19 21 19 0.21 0.29 0.27 0.37
Ohio 141,134 147,651 100,107 78,122 13 15 17 20 0.71 0.80 0.49 0.35
Oklahoma 2,019,199 2,153,852 1,615,384 1,827,328 3 3 3 4 10.12 11.62 7.85 8.16
Oregon 5 2,741 1,110 1,407 31 24 26 28 0.00 0.01 0.01 0.01
Pennsylvania 122,454 152,500 130,853 572,902 14 14 15 8 0.61 0.82 0.64 2.56
South Dakota 1,155 882 1,100 1,862 27 27 27 27 0.01 0.00 0.01 0.01
Tennessee 1,719 1,856 2,000 5,144 25 25 24 25 0.01 0.01 0.01 0.02
Texas* 6,910,021 6,280,654 5,282,723 6,715,294 1 1 1 1 34.63 33.89 25.68 29.98
Utah 91,191 144,817 283,913 432,045 16 16 11 9 0.46 0.78 1.38 1.93
Virginia 8,903 14,906 71,543 147,255 23 22 20 16 0.04 0.08 0.35 0.66
West Virginia 161,251 198,605 191,889 265,174 11 10 13 13 0.81 1.07 0.93 1.18
Wyoming 408,356 776,528 1,363,879 2,305,525 6 5 5 2 2.05 4.19 6.63 10.29
Total** 19,955,823 18,532,439 20,570,293 22,402,141
* Includes state and federal offshore production
** Includes federal Gulf of Mexico offshore production
Source: Energy Information Administration (2011 data unavailable)
82
Table B8
County-by-County Oil Production (Barrels)
1950 1960 1970 1980 1990 2000 2010
Allen 29,940 1,012,122 570,796 664,014 512,567 220,231 216,161
Anderson 12,480 433,170 243,408 292,526 430,464 200,118 186,616
Atchison 0 0 0 0 0 0 0
Barber 1,139,892 1,399,886 806,203 964,249 910,886 473,796 1,822,698
Barton 19,424,231 10,245,807 5,628,888 3,752,180 2,861,812 1,600,501 2,193,822
Bourbon 24,342 28,338 123,561 84,610 149,396 40,208 57,374
Brown 5,579 0 4,043 5,953 2,601 0 0
Butler 6,862,459 7,799,582 3,782,978 2,701,731 2,156,498 1,277,899 1,124,699
Chase 37,594 103,734 64,015 38,944 24,111 39,912 30,190
Chautauqua 812,156 866,298 537,780 736,635 545,902 238,409 240,953
Cherokee 0 0 0 0 0 0 0
Cheyenne 0 13,919 0 88,628 61,063 75,936 91,045
Clark 0 196,649 100,066 791,520 425,012 125,679 431,389
Clay 0 10,340 0 0 0 2,500 3,789
Cloud 0 0 0 0 0 0 0
Coffey 107,394 100,672 131,708 375,093 185,116 137,456 222,062
Comanche 0 23,117 126,069 374,555 387,667 326,812 284,821
Cowley 1,908,243 3,672,337 2,231,547 2,113,902 1,174,762 470,553 444,809
Crawford 59,592 40,751 53,479 34,142 34,449 18,253 28,434
Decatur 0 376,531 662,830 464,187 269,100 130,423 288,124
Dickinson 162,132 62,005 36,940 25,369 30,165 14,501 8,889
Doniphan 0 0 0 0 0 0 0
Douglas 4,000 42,981 28,383 59,140 80,773 36,632 53,030
Edwards 15,009 777,673 235,867 841,415 468,072 203,564 172,008
Elk 182,408 226,278 170,399 229,381 196,343 76,333 63,739
Ellis 11,077,013 11,231,495 7,268,850 4,845,947 4,092,086 2,761,998 3,290,648
Ellsworth 4,149,448 1,654,791 1,291,662 737,699 543,132 325,931 276,772
Finney 215,621 361,396 1,316,296 1,190,724 1,626,570 2,427,038 1,672,361
Ford 0 8,444 27,440 14,720 114,394 75,802 362,909
Franklin 278,804 333,974 112,437 249,786 230,430 97,066 110,533
Geary 0 0 1,752 1,341 2,065 1,376 4,033
Gove 0 10,253 196,606 729,550 999,354 451,447 997,889
Graham 2,131,272 6,116,015 3,968,135 2,080,176 1,957,195 922,742 1,552,681
Grant 0 10,181 134,218 151,085 831,228 304,161 496,259
Gray 0 0 0 259,129 132,156 101,539 92,717
Greeley 0 0 0 89,628 353,707 184,831 199,000
Greenwood 5,375,676 4,758,538 2,158,024 1,177,233 935,594 596,150 465,196
Hamilton 0 13,225 3,380 1,626 4,810 334 0
Harper 7,445 1,212,124 887,487 611,442 455,303 306,196 361,448
Harvey 184,531 677,006 888,848 368,218 201,792 134,502 121,756
Haskell 0 2,427,089 1,247,076 639,789 1,316,196 2,397,757 2,006,044
Hodgeman 13,572 406,519 1,271,815 790,407 638,181 398,401 429,451
Jackson 0 0 15,398 0 6,226 0 1,438
Jefferson 50,532 0 0 0 66,613 21,547 19,423
Jewell 0 0 0 0 0 0 0
Johnson 0 5,235 21,975 18,851 234,277 168,286 158,529
Kearny 28,886 76,337 139,807 311,702 502,515 337,118 273,276
Kingman 147,904 3,174,208 2,701,878 1,214,277 742,989 466,910 628,111
Kiowa 8,275 827,953 735,796 743,807 585,580 334,064 268,550
Labette 6,922 109,598 24,059 55,109 36,140 10,867 8,253
Lane 0 0 38,672 768,254 922,170 546,922 931,892
Leavenworth 10,722 0 1,324 1,824 206,869 81,564 62,793
Lincoln 0 0 0 0 0 0 0
Linn 56,739 67,303 35,242 33,683 213,127 71,304 86,638
Logan 0 3,902 18,527 235,368 232,678 254,805 701,702
Lyon 353,959 157,160 175,609 99,197 66,243 19,656 9,470
McPherson 3,477,164 3,502,798 1,740,988 1,198,459 799,671 455,463 420,551
Marion 595,126 3,297,420 614,816 408,950 296,158 154,741 144,803
Marshall 0 0 0 0 0 0 0
Meade 0 1,018,572 643,190 377,565 493,364 194,388 428,716
Miami 492,171 406,792 119,914 315,101 268,341 137,335 126,839
Mitchell 0 0 0 0 0 0 0
Montgomery 785,932 494,293 300,615 487,564 422,449 99,025 133,352
Morris 26,328 425,022 277,407 188,485 147,818 102,751 62,269
Morton 186 1,340,515 2,506,478 1,516,121 1,650,650 512,880 567,385
Nemaha 13,193 10,046 6,662 6,596 193,074 58,470 48,880
Neosho 615,792 488,212 269,568 297,415 155,244 48,025 28,773
Ness 276,327 594,957 2,487,620 2,215,749 2,264,434 1,473,415 1,921,879
83
Table B8 (continued)
County-by-County Oil Production (Barrels)
1950 1960 1970 1980 1990 2000 2010
Norton 48,295 882,145 546,909 331,496 192,930 100,883 202,837
Osage 0 0 0 15,261 918 642 1,911
Osborne 0 67,016 39,307 156,605 141,133 142,062 148,282
Ottawa 0 0 0 0 0 0 0
Pawnee 454,552 1,301,585 990,910 515,169 386,314 142,944 189,037
Phillips 2,225,857 1,913,264 1,923,650 1,090,842 771,794 456,639 306,251
Pottawatomie 0 0 0 0 1,512 3,174 958
Pratt 2,074,004 1,842,829 1,393,901 687,915 1,094,989 397,346 331,182
Rawlins 0 545,415 667,076 458,013 439,254 175,117 184,901
Reno 2,014,875 777,917 1,032,993 813,340 707,811 555,692 425,931
Republic 0 0 0 0 0 0 0
Rice 8,656,838 4,474,824 4,482,784 1,585,949 1,368,586 780,538 801,180
Riley 0 212,235 101,751 51,606 66,488 26,629 18,011
Rooks 5,759,190 5,634,607 4,216,198 2,672,803 3,168,872 1,632,813 2,008,081
Rush 473,307 301,081 1,110,960 416,226 491,004 221,014 392,920
Russell 13,561,393 8,336,647 6,825,538 4,105,021 3,374,653 1,989,818 1,993,685
Saline 361,030 648,244 347,801 177,669 129,319 71,693 65,720
Scott 50,737 49,423 165,870 108,696 174,034 361,349 662,699
Sedgwick 1,317,395 2,281,774 1,127,662 491,875 302,505 156,542 129,088
Seward 14,176 55,668 955,023 904,219 1,477,078 739,965 380,333
Shawnee 0 0 0 0 0 0 0
Sheridan 421,193 447,956 674,469 276,550 313,703 135,095 341,786
Sherman 0 0 12,859 20,478 8,179 4,431 5,658
Smith 0 0 0 0 0 0 0
Stafford 5,296,899 5,737,031 3,572,135 2,115,411 2,185,220 1,168,549 1,292,724
Stanton 0 31,107 18,732 59,063 476,453 361,505 327,164
Stevens 0 9,170 1,075,804 142,233 616,348 659,761 678,837
Sumner 1,314,572 3,070,483 1,689,124 1,138,696 874,981 509,851 416,571
Thomas 0 1,944 11,896 149,669 364,418 184,905 212,966
Trego 89,902 1,584,441 1,571,495 994,802 900,124 463,143 758,758
Wabaunsee 356,215 280,239 311,280 189,346 111,786 60,412 39,963
Wallace 0 0 0 2,580 266,953 251,161 88,401
Washington 0 0 0 0 0 0 0
Wichita 0 0 2,086 31,980 30,435 64,278 45,894
Wilson 71,005 197,080 173,446 285,161 208,177 112,425 120,440
Woodson 624,366 803,162 863,104 811,803 691,906 493,232 457,433
Wyandotte 0 0 0 0 90 0 0
State Total 107,339,000 113,344,548 85,093,294 59,871,228 57,185,549 35,174,434 40,467,479
Note: The sum of county totals do not add to state total for 1950 and 1960.
Source: Kansas Geological Survey
84
Table B9
County-by-County Share of Oil Production (State Totals in Barrels)
1950 1960 1970 1980 1990 2000 2010
Allen 0.03% 0.89% 0.67% 1.11% 0.90% 0.63% 0.53%
Anderson 0.01% 0.38% 0.29% 0.49% 0.75% 0.57% 0.46%
Atchison 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Barber 1.07% 1.23% 0.95% 1.61% 1.59% 1.35% 4.50%
Barton 18.26% 8.98% 6.61% 6.27% 5.00% 4.55% 5.42%
Bourbon 0.02% 0.02% 0.15% 0.14% 0.26% 0.11% 0.14%
Brown 0.01% 0.00% 0.00% 0.01% 0.00% 0.00% 0.00%
Butler 6.45% 6.83% 4.45% 4.51% 3.77% 3.63% 2.78%
Chase 0.04% 0.09% 0.08% 0.07% 0.04% 0.11% 0.07%
Chautauqua 0.76% 0.76% 0.63% 1.23% 0.95% 0.68% 0.60%
Cherokee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cheyenne 0.00% 0.01% 0.00% 0.15% 0.11% 0.22% 0.22%
Clark 0.00% 0.17% 0.12% 1.32% 0.74% 0.36% 1.07%
Clay 0.00% 0.01% 0.00% 0.00% 0.00% 0.01% 0.01%
Cloud 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Coffey 0.10% 0.09% 0.15% 0.63% 0.32% 0.39% 0.55%
Comanche 0.00% 0.02% 0.15% 0.63% 0.68% 0.93% 0.70%
Cowley 1.79% 3.22% 2.62% 3.53% 2.05% 1.34% 1.10%
Crawford 0.06% 0.04% 0.06% 0.06% 0.06% 0.05% 0.07%
Decatur 0.00% 0.33% 0.78% 0.78% 0.47% 0.37% 0.71%
Dickinson 0.15% 0.05% 0.04% 0.04% 0.05% 0.04% 0.02%
Doniphan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Douglas 0.00% 0.04% 0.03% 0.10% 0.14% 0.10% 0.13%
Edwards 0.01% 0.68% 0.28% 1.41% 0.82% 0.58% 0.43%
Elk 0.17% 0.20% 0.20% 0.38% 0.34% 0.22% 0.16%
Ellis 10.42% 9.84% 8.54% 8.09% 7.16% 7.85% 8.13%
Ellsworth 3.90% 1.45% 1.52% 1.23% 0.95% 0.93% 0.68%
Finney 0.20% 0.32% 1.55% 1.99% 2.84% 6.90% 4.13%
Ford 0.00% 0.01% 0.03% 0.02% 0.20% 0.22% 0.90%
Franklin 0.26% 0.29% 0.13% 0.42% 0.40% 0.28% 0.27%
Geary 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Gove 0.00% 0.01% 0.23% 1.22% 1.75% 1.28% 2.47%
Graham 2.00% 5.36% 4.66% 3.47% 3.42% 2.62% 3.84%
Grant 0.00% 0.01% 0.16% 0.25% 1.45% 0.86% 1.23%
Gray 0.00% 0.00% 0.00% 0.43% 0.23% 0.29% 0.23%
Greeley 0.00% 0.00% 0.00% 0.15% 0.62% 0.53% 0.49%
Greenwood 5.05% 4.17% 2.54% 1.97% 1.64% 1.70% 1.15%
Hamilton 0.00% 0.01% 0.00% 0.00% 0.01% 0.00% 0.00%
Harper 0.01% 1.06% 1.04% 1.02% 0.80% 0.87% 0.89%
Harvey 0.17% 0.59% 1.04% 0.62% 0.35% 0.38% 0.30%
Haskell 0.00% 2.13% 1.47% 1.07% 2.30% 6.82% 4.96%
Hodgeman 0.01% 0.36% 1.49% 1.32% 1.12% 1.13% 1.06%
Jackson 0.00% 0.00% 0.02% 0.00% 0.01% 0.00% 0.00%
Jefferson 0.05% 0.00% 0.00% 0.00% 0.12% 0.06% 0.05%
Jewell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Johnson 0.00% 0.00% 0.03% 0.03% 0.41% 0.48% 0.39%
Kearny 0.03% 0.07% 0.16% 0.52% 0.88% 0.96% 0.68%
Kingman 0.14% 2.78% 3.18% 2.03% 1.30% 1.33% 1.55%
Kiowa 0.01% 0.73% 0.86% 1.24% 1.02% 0.95% 0.66%
Labette 0.01% 0.10% 0.03% 0.09% 0.06% 0.03% 0.02%
Lane 0.00% 0.00% 0.05% 1.28% 1.61% 1.56% 2.30%
Leavenworth 0.01% 0.00% 0.00% 0.00% 0.36% 0.23% 0.16%
Lincoln 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Linn 0.05% 0.06% 0.04% 0.06% 0.37% 0.20% 0.21%
Logan 0.00% 0.00% 0.02% 0.39% 0.41% 0.72% 1.73%
Lyon 0.33% 0.14% 0.21% 0.17% 0.12% 0.06% 0.02%
McPherson 3.27% 3.07% 2.05% 2.00% 1.40% 1.30% 1.04%
Marion 0.56% 2.89% 0.72% 0.68% 0.52% 0.44% 0.36%
Marshall 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Meade 0.00% 0.89% 0.76% 0.63% 0.86% 0.55% 1.06%
Miami 0.46% 0.36% 0.14% 0.53% 0.47% 0.39% 0.31%
Mitchell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Montgomery 0.74% 0.43% 0.35% 0.81% 0.74% 0.28% 0.33%
Morris 0.02% 0.37% 0.33% 0.31% 0.26% 0.29% 0.15%
Morton 0.00% 1.17% 2.95% 2.53% 2.89% 1.46% 1.40%
Nemaha 0.01% 0.01% 0.01% 0.01% 0.34% 0.17% 0.12%
Neosho 0.58% 0.43% 0.32% 0.50% 0.27% 0.14% 0.07%
Ness 0.26% 0.52% 2.92% 3.70% 3.96% 4.19% 4.75%
85
Table B9 (continued)
County-by-County Share of Oil Production (State Totals in Barrels)
1950 1960 1970 1980 1990 2000 2010
Norton 0.05% 0.77% 0.64% 0.55% 0.34% 0.29% 0.50%
Osage 0.00% 0.00% 0.00% 0.03% 0.00% 0.00% 0.00%
Osborne 0.00% 0.06% 0.05% 0.26% 0.25% 0.40% 0.37%
Ottawa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pawnee 0.43% 1.14% 1.16% 0.86% 0.68% 0.41% 0.47%
Phillips 2.09% 1.68% 2.26% 1.82% 1.35% 1.30% 0.76%
Pottawatomie 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00%
Pratt 1.95% 1.61% 1.64% 1.15% 1.91% 1.13% 0.82%
Rawlins 0.00% 0.48% 0.78% 0.76% 0.77% 0.50% 0.46%
Reno 1.89% 0.68% 1.21% 1.36% 1.24% 1.58% 1.05%
Republic 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rice 8.14% 3.92% 5.27% 2.65% 2.39% 2.22% 1.98%
Riley 0.00% 0.19% 0.12% 0.09% 0.12% 0.08% 0.04%
Rooks 5.42% 4.94% 4.95% 4.46% 5.54% 4.64% 4.96%
Rush 0.45% 0.26% 1.31% 0.70% 0.86% 0.63% 0.97%
Russell 12.75% 7.30% 8.02% 6.86% 5.90% 5.66% 4.93%
Saline 0.34% 0.57% 0.41% 0.30% 0.23% 0.20% 0.16%
Scott 0.05% 0.04% 0.19% 0.18% 0.30% 1.03% 1.64%
Sedgwick 1.24% 2.00% 1.33% 0.82% 0.53% 0.45% 0.32%
Seward 0.01% 0.05% 1.12% 1.51% 2.58% 2.10% 0.94%
Shawnee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Sheridan 0.40% 0.39% 0.79% 0.46% 0.55% 0.38% 0.84%
Sherman 0.00% 0.00% 0.02% 0.03% 0.01% 0.01% 0.01%
Smith 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Stafford 4.98% 5.03% 4.20% 3.53% 3.82% 3.32% 3.19%
Stanton 0.00% 0.03% 0.02% 0.10% 0.83% 1.03% 0.81%
Stevens 0.00% 0.01% 1.26% 0.24% 1.08% 1.88% 1.68%
Sumner 1.24% 2.69% 1.99% 1.90% 1.53% 1.45% 1.03%
Thomas 0.00% 0.00% 0.01% 0.25% 0.64% 0.53% 0.53%
Trego 0.08% 1.39% 1.85% 1.66% 1.57% 1.32% 1.87%
Wabaunsee 0.33% 0.25% 0.37% 0.32% 0.20% 0.17% 0.10%
Wallace 0.00% 0.00% 0.00% 0.00% 0.47% 0.71% 0.22%
Washington 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wichita 0.00% 0.00% 0.00% 0.05% 0.05% 0.18% 0.11%
Wilson 0.07% 0.17% 0.20% 0.48% 0.36% 0.32% 0.30%
Woodson 0.59% 0.70% 1.01% 1.36% 1.21% 1.40% 1.13%
Wyandotte 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
State Total 107,339,000 113,344,548 85,093,294 59,871,228 57,185,549 35,174,434 40,467,479
Source: Kansas Geological Survey
86
Table B10
County-by-County Gas Production (1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Allen 357,136 84,667 56,169 23,185 59,668 193,163 479,405
Anderson 0 0 0 7,773 19,953 0 0
Atchison 0 0 0 0 509,711 0 21,239
Barber 6,644,619 53,315,227 30,787,783 15,924,038 14,387,053 11,522,597 19,988,407
Barton 2,530,856 720,233 1,293,969 357,434 563,111 425,351 346,469
Bourbon 0 0 0 0 3,831 4,832 23,380
Brown 0 0 0 0 0 0 0
Butler 0 0 0 0 900 0 0
Chase 69,530 34,540 0 51,455 288,847 288,281 187,927
Chautauqua 134,660 102,454 2,300 239,784 589,357 695,686 583,593
Cherokee 0 0 0 0 0 0 0
Cheyenne 0 0 0 250,619 252,608 391,159 4,297,846
Clark 697,936 6,811,276 7,622,545 7,267,621 4,547,587 3,343,851 3,250,392
Clay 0 0 0 0 0 0 0
Cloud 0 0 0 0 0 0 0
Coffey 11,324 721 0 9,556 2,167 0 48,591
Comanche 0 0 10,269,579 11,433,163 7,936,788 9,896,846 5,462,113
Cowley 1,147,183 1,413,270 504,861 1,844,459 799,301 59,801 155,710
Crawford 45,124 28,651 0 5,217 0 0 25,041
Decatur 0 0 0 0 0 0 0
Dickinson 0 0 0 0 0 0 0
Doniphan 0 0 0 0 0 0 0
Douglas 0 0 0 0 3,337 0 0
Edwards 205,319 1,780,355 5,883,402 6,827,946 3,518,282 2,337,765 1,771,409
Elk 323,433 151,308 94,841 296,577 442,471 163,870 16,781
Ellis 0 0 0 0 0 3,935 0
Ellsworth 17,312 39,332 12,637 909,447 126,950 87,411 356,041
Finney 30,784,079 53,961,070 55,119,195 42,564,954 35,991,543 41,635,762 20,780,789
Ford 10,861 389,851 40,682 1,634,863 1,602,950 463,088 1,841,060
Franklin 0 0 0 129,909 76,733 5,320 7,837
Geary 0 0 0 0 0 0 0
Gove 0 0 0 0 0 0 0
Graham 0 0 0 0 0 0 0
Grant 84,403,364 91,748,893 166,553,679 103,571,719 107,170,799 77,263,890 34,728,185
Gray 0 0 0 0 99,741 97,513 292,578
Greeley 0 0 3,537 4,449,341 5,392,775 4,969,652 2,579,266
Greenwood 0 0 0 0 27,962 1,476 0
Hamilton 5,367,827 4,548,756 19,157,520 12,234,013 10,287,735 13,109,060 6,634,281
Harper 106,507 4,860,913 5,626,767 5,959,346 5,341,887 3,955,949 5,000,614
Harvey 432,415 339,089 394,861 1,872,721 519,500 265,328 246,127
Haskell 31,315,837 35,945,374 56,006,875 37,849,909 37,398,294 44,418,824 24,052,614
Hodgeman 0 0 0 0 56,754 37,098 0
Jackson 0 0 0 0 0 0 0
Jefferson 36,384 0 0 0 159,886 0 0
Jewell 0 0 0 0 0 0 0
Johnson 25,728 76,816 0 30,331 267,122 217,046 46,096
Kearny 71,955,888 69,931,846 127,193,423 88,603,826 58,305,831 65,609,222 30,875,353
Kingman 1,368,757 18,982,088 29,303,547 19,733,353 12,553,998 7,359,218 7,507,643
Kiowa 4,094 3,384,213 22,121,167 15,077,139 11,530,130 5,601,834 3,133,430
Labette 27,871 71,220 0 0 235,196 101,765 4,237,576
Lane 0 0 0 0 0 0 0
Leavenworth 18,545 4,225 0 0 1,585,820 124,877 85,619
Lincoln 0 0 0 0 0 0 0
Linn 10,635 0 0 0 45,215 14,834 0
Logan 0 0 0 0 0 0 0
Lyon 0 0 0 13,465 0 0 0
McPherson 0 260,320 577,449 1,449,044 495,928 189,537 123,168
Marion 108,986 988,700 1,169,913 1,642,677 1,061,074 593,867 448,539
Marshall 0 0 0 0 0 0 0
Meade 2,987,016 14,312,613 15,621,769 10,207,092 8,843,614 6,169,935 4,944,467
Miami 67,126 0 0 223 2,412 83,959 211,694
Mitchell 0 0 0 0 0 0 0
Montgomery 597,832 338,631 0 493,711 1,040,844 1,184,101 12,284,485
Morris 48,371 428,895 0 1,072,105 0 0 0
Morton 24,357,419 76,950,127 87,922,772 57,602,753 49,217,313 43,168,233 23,704,723
Nemaha 0 0 0 0 0 0 0
Neosho 129,315 117,744 668 345 69,513 151,271 12,940,892
Ness 0 0 0 0 0 0 0
87
Table B10 (continued)
County-by-County Gas Production (1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Norton 0 0 0 0 0 0 0
Osage 0 0 0 0 0 0 0
Osborne 0 0 0 0 0 0 0
Ottawa 0 0 0 0 0 0 0
Pawnee 3,146,047 2,869,283 3,438,583 3,049,770 2,093,986 1,235,647 677,891
Phillips 0 0 0 0 0 0 0
Pottawatomie 0 0 0 0 0 0 0
Pratt 2,323,599 1,364,422 1,037,314 6,757,066 3,345,701 1,620,755 2,887,566
Rawlins 0 0 0 0 0 0
Reno 448,918 3,963,203 1,892,149 1,368,771 872,434 1,362,340 781,789
Republic 0 0 0 0 0 0 0
Rice 377,030 458,170 683,006 1,321,201 1,220,114 560,177 647,512
Riley 0 0 0 0 0 0
Rooks 0 0 0 0 0 0
Rush 1,353,835 1,681,004 2,204,811 793,657 762,977 300,572 271,613
Russell 0 279,705 15,547 177,665 33,248 0 0
Saline 0 0 0 0 0 0 0
Scott 0 0 147,200 224,713 360,474 317,998 375,415
Sedgwick 558,751 16,375 0 383,471 66,911 19,871 11,293
Seward 26,997,298 33,009,597 39,723,417 27,536,072 34,734,682 31,836,473 17,177,937
Shawnee 0 0 0 0 0 0 0
Sheridan 0 0 0 0 0 0 0
Sherman 0 0 0 0 338,194 289,978 1,042,573
Smith 0 0 0 0 0 0 0
Stafford 1,161,615 1,149,863 1,372,098 1,220,554 1,320,616 1,060,411 562,713
Stanton 16,018,254 21,848,436 39,210,192 30,144,656 15,346,607 24,972,105 12,736,668
Stevens 101,239,764 122,005,132 165,782,609 166,614,937 147,874,199 122,221,338 48,801,747
Sumner 0 339,126 2,162,059 1,901,058 246,461 711,635 710,031
Thomas 0 0 0 0 0 0 0
Trego 0 0 0 0 0 0 0
Wabaunsee 0 0 0 0 0 0 0
Wallace 0 0 0 0 981 140,639 76,041
Washington 0 0 0 0 0 0 0
Wichita 0 0 0 0 152,413 104,365 74,211
Wilson 191,642 153,456 5,179 200,714 413,715 635,502 12,483,535
Woodson 11,824 6,774 1,375 1,079 123,082 43,181 109,700
Wyandotte 5,470 0 0 5,645 0 0
State Total 420,588,383 632,609,850 901,017,449 693,342,142 592,739,286 533,658,257 333,149,615
* The production from the Hugoton gas ?eld was not split among counties before 1953. The sum of county totals do not add to state total
for 1953 and 1960.
Source: Kansas Geological Survey
88
Table B11
County-by-County Share of Natural Gas Production (State Totals in 1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Allen 0.08% 0.01% 0.01% 0.00% 0.01% 0.04% 0.14%
Anderson 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Atchison 0.00% 0.00% 0.00% 0.00% 0.09% 0.00% 0.01%
Barber 1.58% 8.45% 3.42% 2.30% 2.43% 2.16% 6.00%
Barton 0.60% 0.11% 0.14% 0.05% 0.10% 0.08% 0.10%
Bourbon 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Brown 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Butler 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Chase 0.02% 0.01% 0.00% 0.01% 0.05% 0.05% 0.06%
Chautauqua 0.03% 0.02% 0.00% 0.03% 0.10% 0.13% 0.18%
Cherokee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cheyenne 0.00% 0.00% 0.00% 0.04% 0.04% 0.07% 1.29%
Clark 0.17% 1.08% 0.85% 1.05% 0.77% 0.63% 0.98%
Clay 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cloud 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Coffey 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Comanche 0.00% 0.00% 1.14% 1.65% 1.34% 1.85% 1.64%
Cowley 0.27% 0.22% 0.06% 0.27% 0.13% 0.01% 0.05%
Crawford 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01%
Decatur 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Dickinson 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Doniphan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Douglas 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Edwards 0.05% 0.28% 0.65% 0.98% 0.59% 0.44% 0.53%
Elk 0.08% 0.02% 0.01% 0.04% 0.07% 0.03% 0.01%
Ellis 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Ellsworth 0.00% 0.01% 0.00% 0.13% 0.02% 0.02% 0.11%
Finney 7.33% 8.55% 6.12% 6.14% 6.07% 7.80% 6.24%
Ford 0.00% 0.06% 0.00% 0.24% 0.27% 0.09% 0.55%
Franklin 0.00% 0.00% 0.00% 0.02% 0.01% 0.00% 0.00%
Geary 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Gove 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Graham 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Grant 20.09% 14.53% 18.49% 14.94% 18.08% 14.48% 10.42%
Gray 0.00% 0.00% 0.00% 0.00% 0.02% 0.02% 0.09%
Greeley 0.00% 0.00% 0.00% 0.64% 0.91% 0.93% 0.77%
Greenwood 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Hamilton 1.28% 0.72% 2.13% 1.76% 1.74% 2.46% 1.99%
Harper 0.03% 0.77% 0.62% 0.86% 0.90% 0.74% 1.50%
Harvey 0.10% 0.05% 0.04% 0.27% 0.09% 0.05% 0.07%
Haskell 7.45% 5.69% 6.22% 5.46% 6.31% 8.32% 7.22%
Hodgeman 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.00%
Jackson 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Jefferson 0.01% 0.00% 0.00% 0.00% 0.03% 0.00% 0.00%
Jewell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Johnson 0.01% 0.01% 0.00% 0.00% 0.05% 0.04% 0.01%
Kearny 17.12% 11.08% 14.12% 12.78% 9.84% 12.29% 9.27%
Kingman 0.33% 3.01% 3.25% 2.85% 2.12% 1.38% 2.25%
Kiowa 0.00% 0.54% 2.46% 2.17% 1.95% 1.05% 0.94%
Labette 0.01% 0.01% 0.00% 0.00% 0.04% 0.02% 1.27%
Lane 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Leavenworth 0.00% 0.00% 0.00% 0.00% 0.27% 0.02% 0.03%
Lincoln 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Linn 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.00%
Logan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Lyon 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
McPherson 0.00% 0.04% 0.06% 0.21% 0.08% 0.04% 0.04%
Marion 0.03% 0.16% 0.13% 0.24% 0.18% 0.11% 0.13%
Marshall 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Meade 0.71% 2.27% 1.73% 1.47% 1.49% 1.16% 1.48%
Miami 0.02% 0.00% 0.00% 0.00% 0.00% 0.02% 0.06%
Mitchell 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Montgomery 0.14% 0.05% 0.00% 0.07% 0.18% 0.22% 3.69%
Morris 0.01% 0.07% 0.00% 0.15% 0.00% 0.00% 0.00%
Morton 5.80% 12.19% 9.76% 8.31% 8.30% 8.09% 7.12%
Nemaha 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Neosho 0.03% 0.02% 0.00% 0.00% 0.01% 0.03% 3.88%
Ness 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
89
Table B11 (continued)
County-by-County Share of Natural Gas Production (State Totals in 1,000 Cubic Feet)
1953* 1960 1970 1980 1990 2000 2010
Norton 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Osage 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Osborne 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Ottawa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pawnee 0.75% 0.45% 0.38% 0.44% 0.35% 0.23% 0.20%
Phillips 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pottawatomie 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pratt 0.55% 0.22% 0.12% 0.97% 0.56% 0.30% 0.87%
Rawlins 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Reno 0.11% 0.63% 0.21% 0.20% 0.15% 0.26% 0.23%
Republic 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rice 0.09% 0.07% 0.08% 0.19% 0.21% 0.10% 0.19%
Riley 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rooks 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Rush 0.32% 0.27% 0.24% 0.11% 0.13% 0.06% 0.08%
Russell 0.00% 0.04% 0.00% 0.03% 0.01% 0.00% 0.00%
Saline 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Scott 0.00% 0.00% 0.02% 0.03% 0.06% 0.06% 0.11%
Sedgwick 0.13% 0.00% 0.00% 0.06% 0.01% 0.00% 0.00%
Seward 6.43% 5.23% 4.41% 3.97% 5.86% 5.97% 5.16%
Shawnee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Sheridan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Sherman 0.00% 0.00% 0.00% 0.00% 0.06% 0.05% 0.31%
Smith 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Stafford 0.28% 0.18% 0.15% 0.18% 0.22% 0.20% 0.17%
Stanton 3.81% 3.46% 4.35% 4.35% 2.59% 4.68% 3.82%
Stevens 24.09% 19.33% 18.40% 24.03% 24.95% 22.90% 14.65%
Sumner 0.00% 0.05% 0.24% 0.27% 0.04% 0.13% 0.21%
Thomas 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Trego 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wabaunsee 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wallace 0.00% 0.00% 0.00% 0.00% 0.00% 0.03% 0.02%
Washington 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Wichita 0.00% 0.00% 0.00% 0.00% 0.03% 0.02% 0.02%
Wilson 0.05% 0.02% 0.00% 0.03% 0.07% 0.12% 3.75%
Woodson 0.00% 0.00% 0.00% 0.00% 0.02% 0.01% 0.03%
Wyandotte 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
State Total 420,588,383 632,609,850 901,017,449 693,342,142 592,739,286 533,658,257 333,149,615
* The production from the Hugoton gas ?eld was not split among counties before 1953.
Source: Kansas Geological Survey
90
Table B12
Estimated Economic Impact of Upstream and Downstream Oil and Gas Industry
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars)
Job Count: Job Count: Payroll:* Receipts:
Estab. Estab. Estab. Estab. Estimated Estimated Estimated Estimated
with without with without Indirect Indirect Induced Induced
Upstream Sector Employees** Employees** Employees Employees Jobs Payroll Jobs Payroll
Oil and gas extraction 2,811 6,143 $194,767 $486,933 4,830 $235,377 7,278 $210,569
Drilling oil and gas wells 1,322 0 70,905 0 728 38,375 802 24,357
Support activities for oil
and gas operations 2,925 302 152,266 22,528 2,042 100,146 1,928 61,280
Oil and gas pipeline
construction 1,108 52 74,097 2,659 379 27,523 483 23,347
Pipeline transportation of
crude oil 173 0 18,261 0 202 10,168 175 6,317
Pipeline transportation of
natural gas 701 0 74,965 0 816 41,740 709 25,932
Geophysical surveying
and mapping 212 39 11,292 1,630 97 2,689 156 3,505
Downstream Sector
Natural gas distribution 1,807 0 144,191 0 833 40,718 1,515 41,248
Petroleum re?neries 1,519 0 139,400 0 5,774 452,803 10,544 425,299
Lique?ed petroleum gas,
bottled gas, dealers 521 52 21,012 7,599 36 2,019 36 1,717
Re?ned petroleum product
pipeline transportation 466 0 42,268 0 542 23,534 471 14,621
Naural-gas powered
electricity generation 272 0 27,439 0 83 6,461 250 13,676
Asphalt paving mixture and
block mfg. 200 16 10,989 604 142 7,815 647 17,775
Asphalt shingle and coating
materials mfg. 241 5 14,727 933 215 13,270 1,198 39,189
Petroleum lubricating oil and
grease mfg. 187 13 13,943 978 226 13,219 1,132 37,436
Nitrogenous fertilizer
manufacturing 183 0 14,783 0 309 22,033 234 9,883
Heating oil dealers 176 52 6,855 7,599 14 999 14 850
Petroleum merchant
wholesalers 1,587 34 105,773 6,286 611 29,104 913 31,297
Gasoline stations 11,123 125 230,669 23,224 1,736 68,116 2,320 71,649
General freight trucking 9,248 3,395 476,997 338,655 4,639 255,613 5,554 233,728
Specialized freight trucking 4,604 362 206,930 30,199 1,822 76,013 2,182 69,505
Rail transportation 403 0 49,789 0 277 16,985 345 14,807
Industrial gas mfg. 237 0 17,689 0 346 27,828 368 14,159
* Includes estimates of bene?ts.
** Note: Job counts have been adjusted when necessary to estimate only those counts supported by the oil and gas value chain.
Estab. = Establishments (places of business with a physical address).
Source: Census Bureau; Bureau of Labor Statistics; IMPLAN; Center for Applied Economics, KU School of Business
91
Table B13
Estimated Share of Select Tax Supported by the Oil and Gas Industry Value Chain
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars)
Share
of
Mort- Vehicle State-
O&G Unemp Personal Resi- Insur- gage Related Alcohol wide
Property + Motor Comp Income dential Sales ance Regis- Taxes/ and Avg.
Severance Fuels Tax Tax Property Tax Premiums tration Fees Tobacco Total Total
Oil and gas extraction 298,538 0 2,655 32,485 22,374 49,892 1,798 715 7,574 3,558 419,589 4.5%
Drilling oil and gas wells 0 0 566 3,621 3,139 5,827 251 100 1,031 419 14,953 0.2%
Support activities
for oil and gas operations 0 0 1,273 8,402 7,525 13,935 607 243 2,527 988 35,499 0.4%
Oil and gas
pipeline construction 0 0 364 3,660 2,132 5,156 172 68 718 367 12,638 0.1%
Pipeline transportation
of crude oil 0 0 97 1,018 553 1,462 46 19 194 104 3,494 0.0%
Pipeline transportation
of natural gas 0 0 387 4,211 2,168 6,064 183 76 784 421 14,294 0.2%
Geophysical Surveying
and Mapping 0 0 87 342 548 764 43 17 179 55 2,035 0.0%
Natural gas distribution 0 0 737 6,013 4,213 9,173 344 141 1,468 641 22,730.2 0.2%
Petroleum re?neries 0 0 3,092 34,272 17,818 48,326 1,474 598 6,283 3,372 115,234.7 1.2%
Lique?ed petroleum gas,
bottled gas, dealers 0 0 99 740 633 1,277 52 22 228 89 3,140.1 0.0%
Re?ned petroleum
product pipeline transportation 0 0 255 2,229 1,443 3,359 119 50 518 230 8,204.6 0.1%
Naural-gas powered
electricity generation 0 0 106 1,878 608 2,377 50 20 214 164 5,417.6 0.1%
Asphalt paving mixture
and block mfg. 0 0 148 995 955 1,716 81 33 360 114 4,402.8 0.0%
Asphalt shingle and
coating materials mfg. 0 0 280 2,041 1,580 3,237 134 57 584 221 8,133.0 0.1%
Petroleum lubricating oil
and grease mfg. 0 0 304 1,946 1,601 3,021 132 55 546 216 7,821.5 0.1%
Nitrogenous fertilizer
manufacturing 0 0 119 1,538 732 2,025 60 24 257 142 4,895.9 0.1%
Heating oil dealers 0 0 38 562 254 678 21 9 91 48 1,699.8 0.0%
Petroleum merchant
wholesalers 0 0 544 4,530 3,183 7,003 262 106 1,112 494 17,233.3 0.2%
Gasoline stations 0 447,605 2,612 5,640 15,208 15,700 1,259 516 5,405 1,078 495,024.1 5.3%
General freight trucking 0 0 3,400 48,292 23,217 73,735 1,895 769 8,069 5,143 164,519.0 1.8%
Specialized freight trucking 0 0 1,503 11,969 9,101 21,451 744 302 3,168 1,494 49,732.1 0.5%
Rail transportation 0 0 992 11,898 5,807 16,676 480 196 2,075 1,130 39,255.2 0.4%
Industrial gas mfg. 0 0 162 2,011 935 2,751 78 32 335 188 6,492.0 0.1%
Note: Estimates do not include corporate income taxes or business-level property taxes. These levies could be substantial but there is no
credible way to estimate them.
Source: Kansas Tax Facts (various years); Kansas Department of Revenue; Center for Applied Economics, KU School of Business
92
Share of O&G Share
Average O&G Property of Total
Property Taxes Paid Property
Taxes Paid Statewide Tax Paid
County (Millions) (Percent) (Percent)
Kansas $189.55 n.a. 5.7%
Allen 0.26 0.1 2.1
Anderson 0.16 0.1 1.6
Atchison 0.00 0.0 0.0
Barber 4.11 2.0 36.7
Barton 3.52 1.7 10.5
Bourbon 0.04 0.0 0.3
Brown 0.00 0.0 0.0
Butler 1.79 0.9 2.5
Chase 0.12 0.1 2.2
Chautauqua 0.42 0.2 10.0
Cherokee 0.00 0.0 0.0
Cheyenne 0.57 0.3 13.1
Clark 1.65 0.8 23.2
Clay 0.00 0.0 0.0
Cloud 0.00 0.0 0.0
Coffey 0.09 0.0 0.2
Comanche 2.77 1.5 49.8
Cowley 0.84 0.4 2.5
Crawford 0.02 0.0 0.1
Decatur 0.45 0.2 8.7
Dickinson 0.01 0.0 0.1
Doniphan 0.00 0.0 0.0
Douglas 0.03 0.0 0.0
Edwards 0.78 0.4 12.3
Elk 0.12 0.1 3.2
Ellis 4.93 2.4 14.6
Ellsworth 0.51 0.3 5.7
Finney 14.20 7.8 26.0
Ford 0.49 0.2 1.2
Franklin 0.08 0.0 0.3
Geary 0.01 0.0 0.0
Gove 0.90 0.4 16.6
Graham 2.69 1.2 37.3
Grant 19.33 10.8 65.6
Gray 0.22 0.1 2.5
Greeley 1.28 0.7 25.0
Greenwood 0.69 0.3 7.9
Hamilton 3.95 2.2 42.8
Harper 1.92 1.0 18.3
Harvey 0.29 0.1 1.0
Haskell 12.88 7.0 73.1
Hodgeman 0.92 0.4 16.6
Jackson 0.00 0.0 0.0
Jefferson 0.03 0.0 0.1
Jewell 0.00 0.0 0.0
Johnson 0.13 0.1 0.0
Kearny 16.86 9.5 75.2
Kingman 3.18 1.6 23.5
Kiowa 1.76 1.0 21.5
Labette 0.25 0.1 1.2
Lane 1.62 0.8 27.8
Leavenworth 0.10 0.0 0.2
Lincoln 0.00 0.0 0.0
Linn 0.05 0.0 0.3
Logan 0.61 0.3 11.0
Lyon 0.02 0.0 0.1
Marion 0.38 0.2 2.7
Marshall 0.00 0.0 0.0
McPherson 0.57 0.3 1.6
Meade 1.87 1.0 15.9
Share of O&G Share
Average O&G Property of Total
Property Taxes Paid Property
Taxes Paid Statewide Tax Paid
County (Millions) (Percent) (Percent)
Miami $0.13 0.1% 0.3%
Mitchell 0.00 0.0 0.0
Montgomery 1.16 0.5 2.5
Morris 0.15 0.1 2.1
Morton 10.59 5.9 65.8
Nemaha 0.11 0.1 1.1
Neosho 1.13 0.5 6.4
Ness 3.14 1.5 39.8
Norton 0.24 0.1 4.1
Osage 0.00 0.0 0.0
Osborne 0.19 0.1 3.5
Ottawa 0.00 0.0 0.0
Pawnee 0.50 0.3 5.4
Phillips 0.64 0.3 8.6
Pottawatomie 0.00 0.0 0.0
Pratt 1.40 0.7 7.1
Rawlins 0.39 0.2 8.5
Reno 1.54 0.8 2.1
Republic 0.00 0.0 0.0
Rice 1.36 0.7 9.1
Riley 0.01 0.0 0.0
Rooks 3.43 1.6 34.4
Rush 0.54 0.3 9.5
Russell 3.28 1.6 24.9
Saline 0.08 0.0 0.1
Scott 0.97 0.4 9.2
Sedgwick 0.24 0.1 0.1
Seward 10.85 5.8 34.0
Shawnee 0.00 0.0 0.0
Sheridan 0.44 0.2 9.1
Sherman 0.08 0.0 1.0
Smith 0.00 0.0 0.0
Stafford 2.26 1.1 22.3
Stanton 7.87 4.4 70.1
Stevens 21.74 12.1 78.1
Sumner 1.17 0.6 4.3
Thomas 0.35 0.2 3.0
Trego 1.15 0.5 18.1
Wabaunsee 0.08 0.0 1.0
Wallace 0.39 0.2 11.1
Washington 0.00 0.0 0.0
Wichita 0.12 0.1 2.3
Wilson 1.03 0.4 9.9
Woodson 0.36 0.2 8.4
Wyandotte 0.00 0.0 0.0
Table B14
Property Taxes Paid by Oil and Gas Properties
(Average Infation-Adjusted Dollars and Shares, 1998-2010)
Source: Kansas Department of Revenue; Center for Applied Economics, KU School of Business
93
Directory of Exhibits, Charts and Maps
A 3-D Seismic-Generated Image Underneath the Gulf of Mexico ...........................................................2
Number of Kansas Wells Drilled, by Type, 1889-2011 ...........................................................................4
Kansas Cost Per Well Drilled, by Type (2010$) ......................................................................................5
Average Well Depths by County, in Feet .................................................................................................6
Estimated Average Well Cost per Foot,
Select Years .........................................................................................................................................6
Price of Kansas Oil & Natural Gas (2010$) ...........................................................................................7
Example Oil Well: Production Curve and Oil Prices (2010$) .................................................................8
Example Oil Well: Revenues and Operating Costs (2010$) ....................................................................8
Example Gas Well: Production Curve and Gas Prices (2010$) ................................................................9
Example Gas Well: Revenues and Operating Costs (2010$) ...................................................................9
Total Number of Oil, Gas, and Dry Wells Drilled by State, 2005-2009 ................................................10
Total Oil and Gas Production by State, 2005-2009 ..............................................................................11
A Comparison of Prices for Select Crude Oils (2010$) .........................................................................12
Average December 2011 Posted Prices per Barrel for Diferent Crude Oils ...........................................13
Select Operating Information for Kansas-Based Oil Refneries ..............................................................13
99% Confdence Intervals for Oil Price Forecasts .................................................................................14
World Oil Production and Consumption .............................................................................................15
Oil Consumption-Production Gap and Oil Price (2010$) ....................................................................15
Trends in World Oil Production and Consumption ..............................................................................16
Kansas Wellhead Oil Price (2010$) and Non-Gas Wells Drilled One Year Later ...................................18
Examples of Contango and Backwardation in the Futures Market for West Texas
Intermediate Crude Oil ....................................................................................................................20
Relationship among Futures Curves, Crude Stocks, and WTI Spot Prices ............................................21
Relative Volatility of Select Regional Crude Oil Stock Levels ................................................................22
Comparison of Refnery Distillation Yields and Other Characteristics ..................................................25
Prices for Kansas Crude and Natural Gas (per Barrel, 2010$) ...............................................................27
U.S. Monthly Natural Gas Consumption and Production ....................................................................28
Trend in U.S. Natural Gas Consumption and Production ....................................................................29
Annual Production of Oil and Gas in Kansas, 1890-2011 ....................................................................31
Percentage of Kansas Wells Drilled by Type, 1910-2011 .......................................................................32
Tertiary Oil Recovery ...........................................................................................................................33
Key Elements of Modern Drilling Technology ......................................................................................34
A Sketch of the Upstream Oil & Gas Industry......................................................................................36
U.S. and Kansas Count of Active Drilling Rigs .....................................................................................37
Drill Casing and Cementing .................................................................................................................38
Approximate Area of Interest Related to the Mississippian Lime Formation and Count of
Horizontal Well Permits vs. Wells Drilled (2010 through July 2012) in the Top-6 Counties ............42
Quarterly Upstream Job Count in Select “Boom” Counties ..................................................................43
Upstream Jobs as a Share of Total Jobs (implied by Chart 1) .................................................................44
Quarterly Change of Upstream and Total Jobs (along with Upstream Job Share) in
Williams County, North Dakota .....................................................................................................44
Horizontal Wells Completed in Oklahoma Mississippian Lime Counties .............................................45
Local versus State Government Shares of Oil and Gas Related Taxes and Royalties, Select States .........48
Growth of Kansas Income Resulting from Select Scenarios Related to the Mississippian Lime Play .....50
94
Economic Impact Metrics Resulting from Select Scenarios Related to the Mississippian
Lime Play (Dollars in Millions) ........................................................................................................51
Coalbed Methane Activity in Eastern Kansas,
Wells Drilled (Share of Cumulative Production) ..............................................................................53
Kansas Coalbed Methane Wells Drilled and Kansas Natural Gas Price, 1981-2011 ..............................54
Kansas Coalbed Methane Production, 1995-2011 ................................................................................54
State-by-State Cumulative Coalbed Methane Production, 2005-2010, Billions of Cubic Feet ..............56
Major Migrations of Oil Men ...............................................................................................................57
Kansas Oil and Gas Production as a Share of U.S. Production .............................................................59
Select Events in Early Kansas Oil & Gas History ..................................................................................60
Top-15 States, as Ranked by Upstream Industry Average Share of State Gross Domestic
Product, 1965-2010 .........................................................................................................................61
Annual Market Value of Kansas Oil and Natural Gas (2010$) ..............................................................61
Growth Trends of Oil and Gas Prices and Components of GDP ..........................................................62
County-by-County Share of Jobs in the Upstream Sector .....................................................................63
Kansas Close-Up County-by-County Share of Jobs in the Upstream Sector ..........................................64
County-by-County Value of Oil Production (and Rank) in 2011, $Millions ........................................65
County-by-County Value of Gas Production (and Rank) in 2011, $Millions .......................................65
A Representation of the Oil and Gas Value Chain for the State of Kansas
(Average Annual Economic Contribution from 1998 to 2010; Millions of 2010 Dollars) ................66
Kansas Refneries and Pipelines .............................................................................................................67
Avg. Annual Direct Jobs, Upstream & Downstream, 1998-2010 .........................................................68
Avg. Annual Direct Payroll, Upstream & Downstream, 1998-2010 .....................................................68
Avg. Annual Direct Jobs by Business Establishment Job Count, Upstream &
Downstream, 1998-2010 ................................................................................................................69
Avg. Annual Indirect and Induced Jobs by Sector, Upstream & Downstream, 1998-2010 ...................69
Avg. Annual State and Local Taxes by Type Supported by the Upstream & Downstream
Sectors, 1998-2010, Millions 2010$ ...............................................................................................70
Production Profle of a Representative Horizontal Well
Related to the Mississippian Lime Play ............................................................................................73
Estimated Potential Well Count by County, Select Scenarios ................................................................74
Texas Counties that Help Defne the Geography of the Barnett Shale .................................................74
County-by-County Well Count, Average Well Depth, and Maximum Well Depth ...............................75
Total Wells Drilled by State (2005-2009) .............................................................................................76
Total Footage Drilled by State (2005-2009) ..........................................................................................77
Average Cost per Foot Drilled; Average Cost per Well Drilled; and Total
Cost of Drilling (2005-2009) ...........................................................................................................78
Distribution of Drilling and Production Activity among Select “Major” Oil Companies and
Independent Companies ..................................................................................................................79
State-by-State Oil Production ...............................................................................................................80
State-by-State Natural Gas Marketed Production ..................................................................................81
County-by-County Oil Production (Barrels) ........................................................................................82
County-by-County Share of Oil Production (State Totals in Barrels) ....................................................84
County-by-County Gas Production (1,000 Cubic Feet) .......................................................................86
County-by-County Share of Natural Gas Production (State Totals in 1,000 Cubic Feet) ......................88
Estimated Economic Impact of Upstream and Downstream Oil and Gas Industry
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars).............90
95
Estimated Share of Select Tax Supported by the Oil and Gas Industry Value Chain
(Average Annual Economic Contribution from 1998 to 2010; Tousands of 2010 Dollars).............91
Property Taxes Paid by Oil and Gas Properties
(Average Infation-Adjusted Dollars and Shares, 1998-2010) ............................................................92
Center for Applied Economics
University of Kansas School of Business
Summerfeld Hall, 1300 Sunnyside Avenue
Lawrence, KS 66045-7585
www.cae.business.ku.edu
(785) 864-5134
doc_377925718.pdf