These Kansas businesses, landowners are benefiting while gas prices spike at the pump
Generations of Kansans have pulled oil from below the 80 acres Steve Green owns in southeast Kansas.
His wife’s ancestors settled on the property near Yates Center in the late 1890s and put oil wells on it some time in the 1920s. From his standpoint, it’s a pretty good gig: an oil company made the investment in drilling the wells. The oil company operates the wells. And that company oversees the extraction, storage, transport and sale of the product.
“We just sit back and wait for the checks,” he said.
And those checks have been growing larger in recent months as oil prices have increased across the country.
Last year, the wells that dot properties like Green’s produced 75,000 barrels of oil per day across the state, ranking Kansas eleventh among oil-producing states, according to the Energy Information Administration. Over the last two decades, the state has produced between 25 million and nearly 50 million barrels of oil per year, according to the Kansas Geological Survey at the University of Kansas.
The family property, which is mostly timber, is home to more than 30 oil wells. He and his wife split the mineral rights on the family land three ways with other relatives. So they only earn one-third of the one-eighth royalty the oil company provides for using their property.
“It doesn’t sound like much,” he said. “But at around 1,000 barrels a month at these prices, it’s kind of a deal.”
Oil producers and landowners across Kansas are netting larger returns now that oil has spiked to record prices. Russia’s unprovoked war in Ukraine pushed the national average price of gasoline to $4.25 per gallon on Wednesday, according to AAA.
Like agricultural products, oil is exchanged as a commodity, meaning sellers don’t have much control over prices. So oil companies and landowners receive less revenue when gas is cheaper and more when prices spike.
When prices are high, Green said he and his wife are able to rely less on their retirement funds for everyday expenses. Last year, as prices picked up from a major dip in 2020, the couple earned about $30,000 in royalties on their wells, which generally produce 1,000 to 1,200 barrels each month.
He won’t know how much this current price spike will net him for a month or so. Green said the checks usually arrive 30 days after the oil is picked up and sold to a refinery.
“It could be the highest price we’ve seen but it kind of depends on the production,” he said. “If it stays in that 1,000 to 1,200 barrel bracket, it could be a good month.”
Kansans have been drilling for oil since before the Civil War, though the oil booms didn’t come until the 1890s and early 1900s. The state doesn’t produce the volumes seen in oil-rich states like Texas, Oklahoma and North Dakota, but it’s long produced a steady stream of oil from thousands of wells.
In Kansas, oil is extracted from more than 1,600 small producers who explore for oil and gas, drill wells and operate pump jacks and storage facilities across the state. Green’s wells are operated by Colt Energy, a Mission-based oil and gas exploration and production firm that is also benefiting from higher oil prices.
“I mean obviously it’s a help,” said Chairman Nick Powell. “We went through a period as a lot of industries did during Covid where the price of oil was way down.”
Oil prices plummeted at the onset of the pandemic. In April 2020, prices even went into negative territory on the New York Mercantile Exchange.
“To survive during that time, you had to run up your debt if you had the capacity,” Powell said. “So, now with oil prices being higher, we’re able to pay down that debt.”
Like other local producers, Colt Energy runs what are known as marginal wells, which produce relatively small amounts of oil — less than three barrels per day in Colt Energy’s case. Those operations have been targeted by groups like the Environmental Defense Fund, which points to research showing they are a significant source of methane waste and pollution — claims the Kansas industry disputes.
But even these smaller wells produce a significant revenue stream for businesses, landowners and governments.
Oil extraction drives up county property tax payments. In western Kansas, where oil is more plentiful, some counties derive more than half their property tax revenue from oil and gas, according to the Duke University Energy Initiative. And those payments are tied to the market price of oil.
Powell said spiking prices could as much as double the monthly royalty checks paid to landowners. His company generally pays from one-eighth to three-sixteenths of the price of the oil back to the landowners or those who hold mineral rights on a property.
“This will be a boon not only to the industry itself and the producers,” he said, ‘but it’s going to be a boon to landowners, royalty owners and the counties.”
The Kansas Independent Oil and Gas Association estimates that royalty payments for oil and natural gas extraction reached nearly $1 billion in 2016. About three-quarters of that was derived from oil.
High prices also will drive state tax collections up.
Kansas levies a mineral severance tax, an 8% tax charged on the gross value of all oil and natural gas extracted from the ground. And those figures have been rising as oil prices have increased since early 2020.
Kansas collected $3.4 million in December from the tax. That amount more than doubled from $1.6 million collected the previous December.
When oil prices tanked in 2020, producers turned off some 5,000 Kansas wells, because they cost more to operate than the oil could fetch at market at that time. Now, operators are working on those wells to get them back online, said Edward Cross, president of the trade association.
“It’s really been a year of recovery and that continues right now,” he said.
Currently, high revenues allow some oil producers to invest more in exploration or new well construction, Cross said. But no one in the industry expects this to persist.
“It’s a risky, volatile market. And that’s nothing new,” Cross said. “Our producers have lived through that for many years.”
One such producer, LeRoy Holt II, president of Russell Oil in western Kansas, said this side of the market isn’t actually all that beneficial.
“It’s not good for us,” he said. “Long term anything that’s bad for the overall economy isn’t good for us.”
His company, which operates more than 150 wells, is getting paid more for oil. But he said business costs are also going up. Steel, an important component of drilling equipment, is rising. And Holt expects it won’t be long before the price of electricity and propane, which fuel the wells, goes up, too.
“There’s a short-lived benefit with these higher prices. But our costs catch up almost immediately,” he said. “We’ve been in it for 37 years and I’ve never been a fan of these price spikes. Normally, all it does is make our business more difficult.”
Oil is currently trading over $100 per barrel. Ideally, Holt would like to see oil prices settle closer to $65 or $70 per barrel, a range that doesn’t pinch consumers or producers, he said.
He thinks back to a year ago, when AAA calculated the average price of gas in Kansas at $2.65 per gallon.
“At those prices, we can justify ... costs for exploration and continue to look for new oil at that price and get a reasonable return,” he said. “Anything beyond that is out of balance.”
Those in the business frequently compare oil prices to agricultural products. Both operate within complex global markets. And as the war in Ukraine has underscored, events halfway across the world can instantly change prices, for better or worse.
But in Teresa Winegar’s mind, the fluctuations even out over the long term.
“After all these years I just kind of roll with it,” she said. “I don’t get too concerned one way or the other because I’ve watched it. It always equals out. It just always does.”
She owns 25 acres east of Lawrence, where she and her husband previously lived for decades. The hilly property looks nothing like the stereotype of Kansas, she said, with streams and year-round greenery.
It also has two oil wells.
“I don’t go around saying I’m an oil baron or anything like that because that would be a joke,” Winegar said. “That’s not the way it works.”
The wells aren’t a livelihood, but provide supplemental income. Over the years, royalties funded home improvements and helped when her husband was sick.
“It’s just like raising pigs or cattle or anything else that comes from the land,” she said. “Everything helps.”
Winegar says she typically receives a little over $5,000 per year. But she also pays taxes on that oil production, on top of her regular property taxes.
Taxes are another reason she doesn’t get too excited by rising prices.
“I don’t think about all the money I’m going to get or anything like that. Because on the other end, I’ll have to pay more taxes,” she said. “Pretty much whether it goes up or down it’s pretty level in the long run.”
This story was originally published March 11, 2022 at 5:00 AM.
