Apr 28, 2020

News from the Oil Patch: Kan. wells being shut down

Posted Apr 28, 2020 10:30 AM


Low crude prices are prompting most producers in Kansas to turn off the taps, shutting in wells that are no longer profitable at today's prices and cutting back on new exploration. Nicky Koelsch of the CPA firm Adams Brown Beran & Ball says the downturn in the energy industry is bound to have a big impact on your local, county and state tax base.

"It will lead to low valuations from the oil and gas industry, thus impacting our counties and our schools," Koelsch said  "Many companies may be curtailing all services to these properties which could lead to a reduction in the oil and gas industry workforce. As a result this will result in lost tax dollars from families and an increase in unemployment. Lastly, there could be a decline in severance tax collections, which will ultimately have an impact at the state level and affect the state budget. "

According to reporting in the Leavenworth Times, a revised projection for severance tax revenue for next year drops to just $7 million, compared to $125 million in 2015.  

Kansas Common crude at CHS in McPherson starts the week at $7.25 a barrel after gaining fifty cents on Friday. Kansas crude prices have rebounded from historic lows early last week. CHS dropped its published price to 25 cents a barrel on April 21, a day after Coffeyville Resources posted prices well below zero, including Kansas Common at -$47.50 a barrel. Kansas prices follow the Nymex benchmark fairly closely, and are currently about five dollars below the national futures price.

National prices dipped below zero last week, prompting the question "what does a negative oil price actually mean?" According to the New York Times, if you were in a position to take delivery of a 1,000-barrel contract from Cushing in May, you could have been paid more than $37,000 to do so. 

Some brokers were actually paying buyers to take oil off their hands last week, a wager that storage will become more valuable than oil next month. Tanks at the key energy hub in Oklahoma could hit their limits in three weeks or less according to S&P Global Platts. The government estimates as of April 10 (the latest figures available) that the U.S. was using 57 percent of its working crude-oil storage capacity. That percentage gained three percent for the second week in a row.

Lloyd's List reports a 37% increase in floating crude-oil storage in just two months, to the highest levels seen since 2009. A dramatic 30% drop in global crude consumption has overwhelmed land-based storage capacity.

U.S. Crude futures prices took a tumble on Monday, dropping 25% in mid day trading. The Nymex June contract for light sweet crude was down $4.23 at $12.71/barrel. Contracts for later delivery are not showing much improvement, suggesting investors are not expecting a quick recovery. The July Nymex contract fell more than 11% to $18.84, while the August price dropped more than 7% to $22.

Baker Hughes reported another huge drop in the national Rotary Rig Count. The active rig count in Texas was down 31, New Mexico dropped by 14 rigs, North Dakota was down seven and Oklahoma was down four rigs. Of the 64 rigs that went out of service, 57 were horizontal drilling rigs. Canada was down four at 26 active drilling rigs.

With drilling activity in Kansas slowing down dramatically, Independent Oil & Gas Service added three to its tally of stacked drilling rigs. The weekly Rig Count in Kansas from IOGSI shows no active rigs east of Wichita, down two, and four in Western Kansas, which is up one from last week.  

Operators in eastern Kansas completed 12 wells last week, but Independent Oil & Gas Service reports three of them were dry holes. There was just one completion reported west of Wichita last week. Online reports show an unusual number of wells in our area that have been drilled to total depth but not completed. There are six new drilling permits across Kansas, with two in eastern Kansas and four west of Wichita, including one in Ellis County. The year to date total is down 40% from last year at this time.

Gasoline prices are more than a dollar cheaper than they were a year ago. Triple-A says the national average price for a gallon of regular is $1.80, down from $2.85 a year ago. The Kansas average is just below $1.53 a gallon, a dollar cheaper than at this time in 2019. Twenty states have pump prices that are a dollar a gallon or more cheaper than they were last year. Prices are down to $1.49 in Great Bend, and $1.30 across Hays.

The government reported a big jump in U.S. crude-oil inventories. For the week ending April 17, domestic stockpiles increased by 15 million barrels and are about nine percent above the five-year average for this time of year. The Energy Information Administration reported a drop in U.S. oil production of more than 100,000 barrels per day. Total production for the week ending April 17 was just shy of 12.2 million barrels per day. Crude imports dropped by 700,000 barrels per day, bringing the four-week average down 15% compared to a year ago.

President Donald Trump said he wants to add as much as 75 million barrels of oil to the nation’s Strategic Petroleum Reserve, taking advantage of record low prices for crude. A bi-partisan bill was introduced last week to approve $3 billion in funding to purchase American-produced crude oil for the SPR. The bill was co-sponsored by fourth-district Kansas Congressman Ron Estes. The President also said he is considering blocking imports of crude from Saudi Arabia. 

Bloomberg reports Saudi Aramco has begun reducing oil production ahead of the May 1 start date for OPEC-Plus output cuts. Fellow OPEC members Kuwait, Algeria and Nigeria are also beginning the cuts early.