Petrol Oil & Gas, Inc. [OTCBB: POIG] Coalbed Methane Production

Gas brings prosperity to southeast Kansans

BY PHYLLIS JACOBS GRIEKSPOOR
The Wichita Eagle

THAYER FIELD - A gurgling rumble overpowers the steady ka-chunk, ka-chunk of a bit slamming through rock. The crew of Mo-Kat Drilling edges back a step or two.

The rumble turns to a roar as a stream of rocks, metal, water and natural gas spews out of a pipe and slams into the dike of a pit about 10 feet deep and 35 feet wide.

"Whew, she's a good one," Mo-Kat foreman Billy Thornton says.

Another Cherokee Basin gas well is alive and spitting money.
• • •
It's only a few miles from that well to the modest Wilson County farm home of Geraldine and John Walker.

A nodding pump jack borders a muddy field along the lane leading to the Walker home. It pumps natural gas from deep below the field into a pipeline -- and eventually to homes, businesses, schools and power plants.

And it pumps money into the economy of a region that has lagged behind the rest of the state for decades.

"We're getting a few hundred dollars a month," Geraldine Walker said. "We're waiting until the other wells come in to spend any money."

The wait shouldn't be long.

This is the Cherokee Basin, the current hot spot in the Kansas oil and gas industry.

Here, as many as 11 to 13 layers of coal, ranging from a few inches to a foot or more thick, are being tapped in a search for natural gas, which has become increasingly valuable as U.S. supplies are depleted and political turmoil limits access to reserves in other parts of the world.

Gas production already is creating business, increasing incomes and promising higher tax revenue for counties and the state.

The people who crunch the numbers -- state economists, the drilling companies, the Kansas Geological Survey, venture capitalists and investment bankers -- have faith that this boom is real. And big.

Reserves in the Cherokee Basin are estimated at 3.3 trillion cubic feet -- a value of more than $22 billion at current prices. More gas lies trapped in unexplored coal beds in the Forest City Basin farther north.

The promise is enough to convince drilling companies to buy leases on more than a million acres in 32 Kansas counties.

And it's a promise that brings cautious hope for better times to dozens of landowners such as the Walkers.
• • •
Geraldine Walker figures she and her husband will buy a new car any day now.

John says he's looked at "some real sporty little models" down at the Cadillac dealership.

"Now, John," Geraldine chides. "We don't need to spend that kind of money on a car. We just need something a little newer."

The Walkers, like dozens of their neighbors, are looking at a windfall as drilling companies tap into the natural gas beneath their farm fields.

But these are not the sort of folks to trust windfalls.

They're used to making money slowly on annual harvests won with hard work.

They're skeptical of promises of big bucks coming from a hole in the ground. For much of the last century, southeast Kansas has been the lowest per-capita income region of the state. The countryside is dotted with oil wells -- wells that didn't last.

"That's why we're not ever going to spend $50,000 on a car," Geraldine Walker explains. "I wouldn't spend that kind of money even if I had it."

A landowner typically receives in royalties one-eighth of the revenue produced by a well. That varies with production and prices, but often means $2,000 to $3,000 a month.

Royalty checks have started arriving for landowners in Neosho, Wilson, Labette, Chautauqua and Montgomery counties, but many share the Walkers' reluctance to spend.

"There's a lot of people paying down their debt and putting money in the bank," said George Slaughter, director of new well development for Quest Resource Corp., the Cherokee Basin's largest drilling operator. "They don't feel safe enough to spend it yet."

Oral Borland, 96, has a producing well on her land, but she said she hasn't thought much about the money that will be coming soon.

"I don't need much," she said. "When I get one of those checks, though, I just might go downtown and get me a really good, comfortable pair of shoes."
• • •

While landowners have been slow to trust in the boom and slow to spend, drilling companies have poured hundreds of millions of dollars -- on leases, drilling and construction -- into the local economy.

That in turn has boosted Kansas and Oklahoma businesses that supply equipment, parts and materials.

Quest, a publicly traded company that has roots in the tiny Wilson County town of Benedict, has grown rapidly in the past three years. It is drilling wells as fast as equipment can move into place, with four rigs running full time. It is also building new pipelines and compressor stations, creating jobs for construction crews, backhoe and dozer operators, concrete suppliers and pipe manufacturers, and distributors.

Almost all are local companies with local employees.

Other companies operating in the basin, including giants Dart, Colt and Lane, have similar investments.

"I came to this area in 1982, just as the last oil boom was ending," said Steve Korf, who heads the southeast region office of the Kansas Corporation Commission in Chanute. "There's been nothing in this part of the state since then. Nothing. This is a huge, huge thing for the economy here."

• • •

At the Quest well in Thayer Field, geologist Mike Ebers looks carefully at pieces of rock blasting out of the pipe.

The Mo-Kat crew has installed a meter that estimates the gas flow at about 750,000 cubic feet a day, enough to provide gas to 750 homes for a month.

They've called for a water truck to come "kill" the well by pumping water on top of the gas flow. That will seal it until crews can lay pipeline from the well to a compressor station.

It could be months before those lines actually start bringing in gas. Initially, they'll carry salt water, which seals the gas into the coal formation and must be pumped out to free the gas.

The salt water is piped to a disposal well and pumped back into the Arbuckle, a giant saltwater formation that underlies much of southern Kansas. The process is widely used in the traditional oil industry to dispose of salt water.

The procedure has protected Kansas from the environmental struggles that have caused problems for coal bed methane production in other parts of the country.

"Most of the people around this area know what they're doing. They are moving a lot of salt water but they are doing a great job of disposing of it," said the KCC's Korf. The KCC oversees the drilling industry, including making sure that environmental regulations are followed.

After the water is gone, the gas flow should increase steadily for as long as five years before it begins to slowly deplete.

When one coal seam is exhausted, drillers will go back and open deeper layers, Ebers said. It makes coal bed methane a promising long-term revenue source.

• • •

Car dealers, tire repair shops, convenience stores and restaurants in the area have all seen business pick up.

Times are clearly good in tiny Thayer, which sits in the middle of the heaviest development. The town boasts four restaurants, a busy gas station/convenience store and a bustling Main Street.

There's brand-new playground equipment at McLachlen Park and fresh concrete walkways to the picnic shelter.

Bryan Schulz owns the tire and feed store as well as Smithy's, a gas station and convenience store.

Business has never been better.

"Gas has been a real boost to this town," he said. "Existing businesses are doing great and there are brand-new businesses starting up just because of the gas boom. This couldn't happen in a better place. I love this town. I love to see it doing well."

At the 169 Cafe, owner Marge Laverty said the gas boom is a godsend.

"A few years ago, I was pretty worried about the cafe. I was busy from the road construction but I kept thinking, 'When they get that highway built, what are we going to do?' Then the gas drilling started and we've got all the business we can handle."

Laverty has invested in a self-storage facility and opened an automated car wash.

She expects the gas boom to last.

"From what they're telling me, it'll be around for years," she said. "And people are making enough money on the gas to get other businesses going. It's a good thing. A very good thing."

Sales tax revenues are up in 2004 over 2003 -- by 7.3 percent in Neosho County and 5.9 percent in Wilson County -- well above the state average of 2.9 percent, according to a recent report by community development economist David Darling at Kansas State University.

The ripples are felt as far away as Coffeyville, where three manufacturers are running at full production to make the pumps that lift gas from the wells.

Kevin Weber, a co-owner and manager of J.C. Pump Co., said his business geared back up about four years ago after sitting idle for 15 years.

Business has tripled in the past three years, he said.

"I think the gas business will stabilize at a point where there's good money to be made and then keep going at a pretty decent pace," he said. "Development is just getting started. There's a lot of acreage still to develop. Back at the end of the oil boom, we were seeing land leases about 95 percent developed. Right now only about 5 to 10 percent of the gas leases are in production. That's room for amazing growth."

Across town at Cook Pump Co., manager Jennifer Meek is looking at a backlog of orders all the way through April.

"Normally, we slow down and even have some layoffs in the winter," she said. "Not this year. We're making 80 to 100 jacks a month and every one of them is sold before we make it."

• • •

The promise of more money to come is music to the ears of county governments in a region where financial struggles have been the norm for years.

And it comes without the problems sometimes associated with boom times.

"Oil and gas drilling tends to be capital intensive but not people intensive," said Tim Carr with the Kansas Geological Survey.

"You get added jobs and added money to existing jobs, but not a huge influx of population that strains the system."

Wilson County appraiser Karen Spencer says she expects the impact to grow steadily.

"We really won't get an accounting until after April," she said. "The companies have until then to get numbers filed. But it's definitely already having a big impact."

Compressor stations alone have added huge value to the county tax rolls while a steady increase in employment is added good news, she said.

"Like everybody else, we're kind of waiting to see how it plays out," she said. "We're waiting to see what kind of money comes in and what needs to be spent. But we know that the impact is there. We know it's growing. And it's a great thing to see."