Plunging oil prices give pause to independent operators as they consider drilling new wells

WICHITA, Kan. — When crude prices were high, Kansas oilman Robert Murdock made plans to drill 20 new wells next year. Not anymore.

Murdock, president of Hutchinson-based Osage Resources, said that when oil prices dipped below $60 a barrel this month, "it changes your thinking as far as putting money into the ground." So far, he's scaled down his drilling plans for new wells at least by half.

"If prices continue to decrease, we may not drill any next year," Murdock said. It costs between $2 million and $3 million to drill a horizontal well a mile deep with a lateral of a mile, he said.

Plunging crude prices are hitting oil producers especially hard in places like Kansas, where the industry is dominated by smaller, independent operators who depend more heavily on the cash flow from producing wells to pay for drilling new ones.

The growth in new drilling across the country will almost certainly slow, analysts say, as drillers avoid rock that is either not very well understood or known to be not very prolific. When oil prices are high, that drilling can be profitable, but at low prices that drilling is either too risky or unprofitable. That is particularly true in Kansas, where the vast majority of oil wells are stripper wells — typically low-producing wells that yield about 10 barrels or less per day.

Most of the big oil firms that rushed into Kansas in 2011 and 2012 to drill horizontal wells from the same the Mississippian Lime formation that had spawned an oil boom in neighboring Oklahoma had already left last year after exploratory drilling proved disappointing. The state's remaining independents, with their lower operating costs and lower-producing wells, still flourished when crude prices were high.

But if oil prices remain low, those smaller independents are expected to sharply curtail new operations.

Already, the number of rigs drilling oil onshore across the country has started to fall, according to weekly data from the drilling services company Baker Hughes, though the number remains far higher than last year at this time. The number of U.S. oil rigs fell by 29 to 1,546 for the week ending Dec. 12. It is the largest decline in two years, but the level is still 135 higher than last year at the same time.

The Energy Department's Energy Information Administration recently reduced its expectation for U.S. oil production growth next year by 100,000 barrels per day because of lower prices, but it still expects the nation's production to rise 8 percent to 9.3 million barrels per day, which would be the highest since 1973.

In Kansas, the full impact to the industry may not be clear until after the first quarter of next year, in part because drilling activity normally slows each year in November and December anyway, Cross said. Also, while prices have dropping for some time, it was not until this month that the steepest declines in crude prices hit.

When prices were high, the number of intent-to-drill applications filed with Kansas regulators peaked last April at 1,015 filings — almost double compared to the same month a year earlier. By November, just 517 drilling intent applications had been filed, —only slightly ahead of last year for that month, according to the Kansas Corporation Commission.

Rex Buchanan, interim director of the Kansas Geological Survey, said "the big question is the duration" of the lower crude prices, while acknowledging that nobody expects prices to go back up as quickly as they fell.