Energy Security

Oil prices have become a narrative for American life.

Prices go up, people feel the pinch. Prices relax and consumers have more money in their pocket and the sun shines a little brighter.

Oil spills and conflicts in Middle East countries keep foreign oil and large oil companies in the headlines and at the center of America’s attention. The latest reports describe slowing supply, growing demand and the resulting price hike. The situation has created a public that believes America needs to cut ties with the Middle East and look at home for energy and oil. Washington has taken up the same battle cry as many Republicans begin to question both domestic reserves and the country’s drilling permit process.

The feeling appears mutual among voters. A 2009 poll showed that 61 percent of people who voted in the 2008 presidential election support access to American oil and natural gas resources.

That’s where Bryan Hess comes in. Hess and his family, which owns Hess Oil in McPherson, works daily to keep oil wells pumping and potential sources of new oil on the map. The family is not alone. It is one of thousands across the state working toward the same goal.

Kansas is one of the top 10 domestic suppliers of oil and natural gas in the U.S. and for seven out of the last 10 years, oil production within the state has increased and is expected to continue to do so even with fewer wells pumping.

The push for greater domestic energy production has been present for years, said Edward Cross, president of the Kansas Independent Oil and Gas Association, but turbulent international issues have pushed the idea to the forefront and production states, such as Kansas, are leading the charge.

“Every barrel of oil we can produce here is one less barrel we have to import from a foreign source,” Cross said.

Energy Independence

Richard Nixon first proposed the concept of energy independence in 1973 as part of his Project Independence and pledge that the U.S. would “meet our own energy needs without depending on any foreign energy source” within seven years. That deadline came and went. Man walked on the moon and televisions grew larger but American did not cut the embilical cord with foreign oil. In fact, since that time, the U.S. has gone from importing about a third of its oil to importing 60 percent of its oil.

Americans need to look at energy independence, Cross said, not from Nixon’s point of view, but from the understanding that America will never be independent of foreign oil sources but can become energy secure.

“That definition recognizes that trade itself is not bad,” Cross said.

The key to becoming energy secure is growing production to meet exploding demand.

The International Energy Agency projects that global energy demand will jump 50 percent between now and 2030. Fossil fuels have and will likely continue to be the main source of energy for many countries, meeting 80 percent of the world’s energy needs.

When talk of more domestic oil production comes up, it’s states like Kansas that are often doing the talking. And it’s not large, multi-national corporations at the center of the conversation, it’s small family operations with fewer than a dozen employees and a multi-generational tie of the land and its resources.

“ . . .Oil and natural gas will remain the most critical and strategic component of the global energy mix for a very long period of time due, in large part, to significant cost and infrastructure advantages,” Cross said. “ . . . Despite what peak oil theorists may say, there is more than ample oil and natural gas resources available in the world to meet this demand. Even here in Kansas, smaller discoveries continue to increase oil and natural gas output in our state.”

But oil prices have played a key role in keeping production steady. When oil prices drop, as they did a few years ago, companies begin shutting off wells. With prices on the rise, oil wells have begun flowing once again.

“We’ve seen some pretty wild swings over the past 10 years,” Hess said. “We hang on during the lean times and wait for the good years.”

Two years ago, lagging prices were forcing oil companies to tighten their belts, shut down rigs and cut staff. Today, oil prices have rebounded to a level that has made production a money-making venture. According to crude oil price bulletins posted daily by the National Cooperative Refinery Association in McPherson, Kansas common oil sold for $89.25 per barrel on March 1. That price jumped to $91.75 a barrel on March 2.

Hess said his company is operating at maximum capacity and demand for its independent drilling operation is also rising.

State-wide, oil production has increased by a compound average of 1.69 percent over the last 10 years.

The higher prices are great Hess said, but with higher oil prices come higher input and employee costs, which cut into any profits an oil company may realize.

Industry Health

Wind turbines may be the new face of energy in Kansas, but oil wells have been the consistent image of energy production. State-wide, more than 45,000 wells pumped nearly 40 million barrels of oil from the ground in 2010. In McPherson County alone, 615 operational wells produced just over 349,000 barrels of oil last year and a total of 209.6 million gallons since drilling started in the county in the early 1900s. According to data from the Kansas Geological Survey, Kansas has produced a cumulative 6.6 billion gallons of oil since the turn of the century.

The discovery of oil marked a high point in the state’s history as individuals and companies rushed to discover more of what was then known as “liquid gold.” Oil discovery was the catalyst for growth in many towns and eventually became the decline of those same communities.

Today, the industry does more than fule homes and vehicles, it contributes both taxes and jobs to the state.

Data from the Independent Oil and Gas Association shows the industry pays taxes multiple times throughout the production cycle and last year contributed more than $345 million in severance and ad valorem taxes.

That equates to more than 12 percent of the value of oil and natural gas produced in the state going toward taxes. Consequently, the oil and natural gas industry has become one of the most heavily taxed industries in the state.

Together, the various aspects of the oil and natural gas industry employ about 13,800 people, contributing $814 million in income each year. For counties like McPherson, where nearly every aspect of oil production is represented – from the exploration firms to the companies that provide service for the wells to the refinery that processes the crude oil – hundreds of jobs are based on the health and continued success of the state’s oil industry.

For some western Kansas counties, oil production provides a paycheck for nearly a quarter of the population.

Oil exploration and production also means income for landowners. Rural Kansas, the site of most of the state’s drilling, saw nearly $1 billion in revenue from oil exploration and production during the past three to four years.

Oil companies pay landowners for access to ground to search for oil reserves. If a company wants to drill, it means more money for the landowner. A typical drilling contract will give the landowner ownership of 1/8 or 5/16 of the oil produced. When oil prices go up, landowners profit.

J.L. White, director of Communications for Kansas Strong, a organization dedicated to the promotion of oil and natural gas, said positive public perception is a key component of the continued success of the industry.

Relaying revenue and tax figures from the industry, White said, is essential to showing people the importance of continued production of both forms of energy within the state.