Executive viewpoint

After many decades of productive stewardship, oil and natural gas resources continue to play an important part in the livelihoods of Kansans. In 2022, the Kansas oil and gas industry generated nearly $3.6 billion in output, put tens of thousands of people across Kansas to work, and pumped hundreds of millions of dollars into the state’s economy. That activity continues in 2023. The industry supports over 100,000 jobs, $3 billion in family income, and $1.4 billion in state/local tax revenue. The industry is an important element of the Kansas economy today, and will be a critical part of the economy going forward.

The economy is one big circle. The oil and natural gas industry employs people, who pay taxes to various governmental entities, which then provide services, such as schools, roads and hospitals, to individuals. When the oil and natural gas industry thrives, everyone benefits!

While the U.S. and Kansas economies continue to grow, uncertainty remains. Inflation remains a concern, real wages have fallen, and the Fed’s interest rate hikes have contributed significantly to a strong U.S. dollar and downward pressure on oil prices.

Most destructive for the economy has been Biden’s historic spending spree. The Democrat-led Congress has given the Biden administration $4.8 trillion in new spending, which the Federal Reserve said was the main inflation contributor.

The crude oil market is fraught with uncertainty related to inflation, U.S. trade and foreign policy, demand and more. This uncertainty creates volatility in crude oil prices and significantly impacts on the small businesses that make up the Kansas oil and natural gas industry.

Independent oil and gas industry leads the way. Independent producers continue to lead the way in the Kansas oil and natural gas industry. Independent producers account for over 92% of the oil and natural gas produced in Kansas.

Kansas independent oil and natural gas producers have significant advantages. The independent producers in Kansas have developed strong skill sets, based on their size and scale. Independents historically use their resources to the fullest and, therefore, accelerate the process of creating value from their assets. Independents are typically able to run quicker and leaner than larger companies. Finally, Kansas independents know the state’s geology and how to develop wells in Kansas. They have a subsurface intelligence that you cannot buy, which gives them an incredibly unique competitive advantage.

Kansas industry activity. Over my 30+-year oil and gas career, I have seen many changes in the oil and gas industry. But at no time in my career have I experienced a time of more dramatic and rapid change than what has happened over the last two years or so, and which continues today. I don’t know a lot of things about the future, but I do know that the pace and complexity of change will likely increase.

Kansas producers worked in 2022 to optimize supply chain relationships, improve operational efficiencies, and refocus capex on the most resilient short-cycle projects. That has continued in 2023.

Oil and gas exploration/production activity was robust in 2022. As a result, Kansas crude oil production increased 0.4% (Fig. 1), and natural gas production declined only 3.3%. Kansas oil and natural gas production in 2023 looks to be on a slight decrease from 2022. Nearly 76% of the value of the Kansas oil and natural gas industry comes from oil production, and 24% comes from natural gas output.

Fig. 1. Kansas oil production was up 0.4% during 2022, but it appears to be down slightly this year. Image: Kansas Independent Oil & Gas Association.

Escalating service and supply costs, uncertain market conditions, regulatory uncertainty, high electric rates, and labor challenges have dampened industry activity in 2023, Fig. 2. Drilling permits issued in Kansas during 2023 are down 21.4%, as compared to the same period a year ago. In addition, the drilling rig count in Kansas is down 17%, as compared to the same period a year ago.

Fig. 2. A variety of factors have dampened Kansas drilling activity during the first half of 2023. Image: Kansas Independent Oil & Gas Association.

A tight labor market has made it difficult to find qualified workers. Three driving forces are behind labor market challenges:

1. Demographics—U.S. population growth, along with immigration, has restricted the labor supply. Within the demographic shift are baby-boomer exits, leaving behind a labor gap.
2. State of the economy—The pandemic saw an injection of federal funds into the economy, where firms soaked up all the labor. Kansas returned to its pre-pandemic employment levels in early 2021. Thus, in 2022 and 2023, we see increased competition among employers for remaining labor.
3. Friction within the labor market—Firms have changed processes, requiring a different combination of skills and knowledge. It takes time for laborers to gain the education and experience that firms demand today.

Electrical power is the highest operating cost for most wells in Kansas. The state has one of the lowest electric generation prices in the U.S., but some of the highest retail electric rates in the Midwest.

Going forward, Kansas producers are focusing on the most resilient short-cycle projects and concentrating on their core competencies and smaller producer advantages. Kansas producers are working to optimize supply chain relationships, improve operational efficiencies, reduce and refocus capex, and examining acquisition and divestiture opportunities. Operators are high-grading and drilling only the best projects. In many cases, improved productivity is less about improved technology and more about better application of existing technology.

Our industry continues to face many challenges that have grown both in number and complexity. We have powerful enemies that want to severely limit our access to abundant reserves of oil and natural gas, shut down drilling because of exaggerated issues, litigate us to death, and unfairly tax and regulate us to the breaking point.

As independents, we know the oil and natural gas business is fraught with tremendous risk. These very challenges have defined the generations of Kansas independent oil and gas producers, who have played, and continue to play, a vital role in meeting our nation’s energy needs.

The history of the Kansas oil and gas industry is an American story of industrious entrepreneurs, who exhibited the pioneering spirit this country is known for, of innovation, speculation, and perseverance. All contributed to the founding and development of the Kansas oil and gas industry, which has and continues to transform the world.