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Rising Gas Prices Pump Up Virginia’s Oil Industry

July 4, 2008

By Scott Harper, The Virginian-Pilot, Norfolk, Va.

Jul. 4–ST. CHARLES

For decades, companies drilling for natural gas here in the remote mountains of southwest Virginia have known that the wells yield another coveted resource: crude oil.

Until recently, though, the quantities were considered too small to matter — a nuisance byproduct of gas production that sometimes was released back into the ground.

But that was before market prices for crude soared above $130 a barrel.

Now, the state’s gas industry, which is experiencing its own boom, is welcoming this “nice bonus” — separating crude at wellheads, storing it and later selling it for refining into fuels, said Jerry Grantham, a top officer with the Virginia Oil and Gas Association, a trade group.

“Geologically, there’s not a lot of oil out there,” said Grantham, “but you certainly hold on to what you get, that’s for sure.”

The hunt for domestic oil and gas has intensified in recent months, as prices soar, presidential candidates debate prospective energy policies and Virginia wrestles with potential drilling off its coast.

Among oil-producing states, Virginia finished last in the nation in 2006, generating just 7,000 barrels from a handful of wells that exclusively target crude oil, according to the U.S. Energy Information Administration. Those wells are located in two counties — Lee and Wise, at the far southwestern tip of the state.

Another 9,000 barrels were culled from Virginia gas wells in 2006 in Lee, Wise, Buchanan and Russell counties, for a combined total worth more than $2 million at current prices.

Allen Yates, production superintendent for Daugherty Petroleum Inc., a Kentucky company that drills for crude oil and natural gas, recently drove his pickup to inspect a well site near the town of St. Charles, in Lee County.

After winding past trailer homes and shacks along thin, gravel roads that lead high into the Appalachian Mountains, Yates reached one of 38 wells that Daugherty operates in Lee and Wise counties.

It was a pumping well, the kind that slowly bobs up and down like a teeter-totter. The kind often seen on flat, hot, Texas plains.

This one, in service for about a year, is drawing crude oil and natural gas and “has performed pretty darned well,” Yates said. A computerized timer starts the pumping action every six hours or so to save electricity.

“It’s like a water well,” he explained, “with a straw sunk down into the glass. It basically just sucks up the material.”

The crude oil runs downhill through a pipe to two, 210-barrel storage tanks surrounded by a low earthen berm designed to contain any spills.

Yates climbed a ladder on one tank, opened a hatch, and sniffed.

“You know, Virginia crude is kind of green-colored, almost yellow sometimes,” he said. “Very good quality. The refineries love it, since they don’t have to add too much to it.”

A tanker truck periodically climbs the mountain and takes the oil to a refinery in Tennessee, about two hours away. Other companies cart their oil to a refinery in eastern Kentucky.

The only refinery in Virginia, in Yorktown, handles mostly foreign product.

While Virginia ranked last, Texas was the No. 1 domestic oil producer in 2006, the latest year for which national statistics were available.

The Lone Star State generated nearly 400 million barrels sucked from on-land and offshore wells.

Just ahead of Virginia were Missouri and Arizona. No oil was generated in neighboring North Carolina or Maryland. But in Kentucky and West Virginia, more than 2.3 million and 1.7 million barrels, respectively, were produced in 2006, according to government figures.

Coal remains the richest fossil fuel mined in Virginia by far. But the energy resource drawing the most attention these days in the state is coal bed methane, a natural gas that looks, acts and smells like conventional gas.

Methane is typically found in gaps within untapped coal seams, often at much shallower depths than conventional gas. Its withdrawal, then, is cheaper and helps to safeguard coal mining, as methane is known to easily explode.

A record amount of natural gas was generated from Virginia wells in 2006, at more than 102 billion cubic feet — enough to power all residential users in the state. This fact, too, was a first in Virginia, according to government and industry officials.

About 80 percent of this total output was coal bed methane, worth more than $660 million. The methane originates in six adjoining counties, all in southwest Virginia, and mostly in Buchanan County.

The skyrocketing trend, ongoing since the late 1990s, continued last year: The Virginia Department of Mines, Minerals and Energy reported last week that 112 billion cubic feet of natural gas were produced in 2007, yet another record.

“And there’s still a lot of potential out there,” said Grantham, who also is vice president of Pine Mountain Oil and Gas Co., based in Abingdon. “We expect the industry to continue growing — more wells and more exploration in the region,” he added.

Back in his truck and headed to another well, Yates talked about the current boom in Appalachia.

Wildcatting, he said, is again in vogue, with entrepreneurs raising money to sink a well or two in hope of hitting it big. Established companies are exploring and drilling for new supplies, too.

One well can cost up to $300,000 to get running.

“Every day it gets harder to find the equipment you need,” Yates said. “Everyone’s buying it all up, trying to get in the business.”

Yates was laid off from another energy company in 1999, when oil and gas prices were much lower and the industry was flat.

“Everybody was cutting back, and this whole region was just a mess,” he said, mentioning upturns in personal bankruptcies and abuse of the drug OxyContin that accompanied the economic crunch.

“Now, though, the same people — me included — have come back. It’s unreal to see it take off like this,” Yates said.

“But with energy needs stretched like they are, both here and abroad, I don’t think it’s going down again. I think this’ll last.”

At another site, the natural gas pulled from the well hisses as it flows into a skinny line. A meter tracks the amount generated, which Yates inspects.

From the well head, the gas runs down the mountain through a series of surprisingly small pipes, which sometimes are buried on the side of the road and sometimes are exposed. Leaks can occur here, and vandalism and damage must be monitored daily, Yates said.

Building such infrastructure was perhaps the hardest, most labor-intensive part of establishing the company’s presence in the region.

But it was necessary and helps to manage the local market, since anyone who wants into the business must pay to tap into the pipeline. Or build their own, which requires permits, land and lots of money.

All of Daugherty Petroleum’s wells lead to a compressor plant on the outskirts of St. Charles, a fenced facility beneath a mountain face. It is marked with warning signs and acts like a way station.

Here, all emergency-response equipment is stored, as required by regulation, in case of a spill or leak somewhere in the mountains.

Yates laughed when he heard cicadas buzzing in the thick woods surrounding the compressor plant.

“People assume that noise is a gas leak,” he said. “We get calls all the time when the cicadas are out.”

From the small plant, the gas is pushed toward larger pipelines that stretch like spider webs across the state and up north to big-city markets.

On his way back to town, the radio crackled with news and updates from his well tenders. He cannot use his cell phone out here.

As he turned up the air conditioning, Yates described the difference between Virginia’s reserves and those in other states.

“Texas wells will produce in a day what we get in a month,” he said. “Virginia gives it up slow, but gives it up forever. Slow and easy, that’s us.”

The first commercial well in Virginia was drilled in 1931 near Bristol. It struck natural gas. Since then, more than 7,500 others have been sunk in search of gas and oil.

In 2006 alone, companies and entrepreneurs opened nearly 650 new wells.

Inside his office in Abingdon, a town off Interstate 81 where much of the gas industry does business, Grantham, the Virginia Oil and Gas Association executive, welcomed visitors.

On the walls are hung old black-and-white photographs of oil and gas wells from the early days in the 1940s.

“Looks like something Jed Clampett would use,” Grantham said with a grin, a reference to the main character in the classic TV sitcom “The Beverly Hillbillies.”

On the other side of the room are color photos of tall, modern structures and well-maintained roads, of workers in safety gear. “Funny,” he said, “it’s the same product we’re after but a totally new way of getting it.”

Scott Harper, (757) 446-22340, scott.harper@pilotonline.com

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Copyright (c) 2008, The Virginian-Pilot, Norfolk, Va.

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