July 19, 2005

Rising Oil Prices Revive Drilling in Illinois

Jul. 18--CARMI, Ill. -- In a small, open-air workshop across Highway 1 from Wal-Mart here, a trio of welders is busy on the newest addition to Les Wilson Drilling Co.: a $2 million machine capable of boring 9,000 feet into the earth in search of oil.

As recently as a year ago, Vice President Bob Wilson, 57, wasn't confident enough to make the investment. But today, with crude oil futures trading at more than $60 a barrel on the New York Mercantile Exchange, he's more certain of the need for a new rig -- maybe two.

"We're going out on a limb to do this. But the future looks strong," said Wilson, a spry, third-generation oilman whose grandfather Les Wilson chased the oil boom to Southern Illinois in the late 1930s.

The drilling rig -- the first built in this area in years -- is not simply a gamble for Wilson. It's also tangible evidence of how rising crude oil prices are helping the tired Illinois Basin begin to recover from a 20-year slump.

Dozens more permits have been issued to drill for oil, and more rigs are at work in the basin, a 60,000-square-mile area covering much of Southern Illinois and parts of western Indiana and Kentucky.

But producers in the basin aren't flourishing in the same way as multinational giants, such as Exxon Mobil Corp. and Shell Oil Co., which are reaping windfall profits as demand for petroleum soars.

Across the Illinois oil patch, producers are hamstrung by a lack of labor and rigs, which left over the past two decades as operations languished. The rusted, idle pump jacks that dot Southern Illinois cornfields serve as a reminder that the industry has been in decline.

"Obviously, things are picking up," said Brad Richards, executive director of the Illinois Oil & Gas Association in Mount Vernon.

"The service and supply companies are very busy. And if you want a rig, you're going to have to wait in line," he said. "But there really isn't a boom here."

Two crashes devastated the petroleum industry. In 1986, oil prices tumbled to $11 from $26.50 a barrel. In December 1998, the price bottomed out at $8.64 a barrel -- below the cost to produce it.

Still, many companies continued operating at a loss, because they didn't want to lose their leases, labor and equipment.

"It's unbelievable what this industry went through," said Richard Straeter, president of Illinois operations for Enid, Okla.-based Continental Resources Inc., one of the region's biggest producers. "Numbers had to be reduced so drastically that office staff had to go out in the field."

Many small producers and oil field service companies fell behind and eventually went out of business. What's more, familiar names, such as Exxon and Texaco, sold their assets and disappeared from the basin in the 1980s in search of bigger oil fields in more promising places, such as West Africa and Russia. Major oil field service companies pulled out more recently, taking with them needed tools and technology.

Now that oil prices have recovered, Illinois Basin companies that survived the downturn are struggling to make a comeback.

The number of drilling rigs available has slipped to about two dozen from more than 100 in the 1980s; the waiting list for a rig is about six months.

Finding a crew of trained rig hands can be tougher. Even amid high unemployment rates in some Southern Illinois counties, workers who lost their jobs during the last oil bust are reluctant or unable to come back. Many moved from the area or found more stable jobs that don't require hot, dirty, demanding work.

"People are trying to put more drilling rigs back in service," said Mount Carmel oilman J. Roy Dee III, whose grandfather founded Dee Drilling Co. in 1939.

"We're all investing in our equipment. We're trying to train people," he said. "But a lot of the folks that ran those rigs years ago are too tired or too old."

In many ways, the Illinois Basin reflects broader problems.

Only about 60 percent of the jobs lost nationwide during the 1998-99 oil crisis have been recovered, according to the Independent Petroleum Producer Association, a trade group in Washington.

"We're beginning to see some people come back into the industry," said spokesman Jeff Eshelman. "But, certainly, we have a really long way to go."

The labor shortage extends beyond rig hands. Many experienced engineers and geologists have retired, and colleges aren't producing enough new ones to replace them. Some schools have gotten rid of petroleum engineering programs altogether.

"Young people aren't coming into the industry," said Dale Helpingstine, a geologist for Shakespeare Oil Co. in Salem, Ill. "I'm 47 years old, and there aren't hardly any geologists in the basin younger than me."

It was a century ago that the first oil was pumped from the Illinois Basin, once a vast inland sea, where over millions of years, the remains of sea creatures and plants trapped between reef and rock were transformed into petroleum.

The real oil boom came 65 years ago, with the advent of seismic technology that uses sound waves to map underground rock layers. That helped boost the state's annual oil output to a peak of nearly 148 million barrels, exceeding that of Iraq at the time.

By the early 1970s -- when U.S. oil production peaked -- Illinois' output had slipped to about 40 million barrels a year.

Today, though oil is still being pumped from the Oblong Field, which began producing in 1908, Illinois' total annual production stands at just over 10 million barrels. That's less than 1 percent of the U.S. total.

Most wells in Illinois are known as stripper wells, run by mom-and-pop operators that produce about 2.5 barrels a day. Only a few produce more than 1,000 barrels a day.

If anything good came from the years of sagging prices, it's that producers were forced to become leaner and more efficient to survive.

Dee is among those who scaled back -- way back. From 1986 to 2000, his company drilled just one well a year. This year, he'll drill 15.

"We just kind of hung in there," he said. "We figured out ways to do things more cheaply."

Even with drilling activity on the rise, Richards -- one of the biggest boosters of the oil business here -- is the first to tell you that the industry has been in decline for a half-century and will never again reach the level seen even 25 years ago.

Membership in the Illinois Oil & Gas Association -- 400 companies and 2,000 people -- is half what it once was, but up from the late 1990s, he said.

Hope for the future is grounded in knowledge that only about a third of the 12 billion barrels of oil in the basin has been produced, according to the Illinois State Geological Survey. And while some of it will never be extracted, there's plenty that can be.

"Barring any major new discoveries, there is still substantial resources in the ground that can, in theory, be produced," said Beverly Seyler, a geologist who heads the survey's oil and gas section.

For instance, about 400 million barrels have been pumped from layers of sandstone in Illinois' Lawrence Field, named for the county just west of the Indiana border. Using techniques such as injecting water or polymers into the oil reservoir to expand production may yield another 10 percent, Seyler said.

That would be enough to satisfy Illinois' petroleum demand for two months.

Such technology increases production costs. And bearing higher costs requires confidence by oilmen that crude prices, even if not $60, won't collapse.

"A year ago we were all pretty much saying this is a speculative bubble, and it won't last," said Bill O'Grady, director of fundamental futures research at A.G. Edwards Inc. in St. Louis. "Now, for the first time since the 1930s, we don't have a cartel-like group that can increase production and affect prices."

Because the Organization of the Petroleum Exporting Countries lacks spare production capacity to influence prices, the force most likely to lower oil prices would be declining demand. And over the next couple of years, absent an economic slowdown, a flu pandemic or massive terrorism attack on a scale larger than Sept. 11, 2001, prices should remain firm, O'Grady said.

Most oilmen, tired of complaints about $2-a-gallon gasoline, are quick to note that even at $60 a barrel, oil is still less than two-thirds of its inflation-adjusted high: $94.77 during the Iran hostage crisis in 1980.

Crude produced in the Illinois Basin brings about $6 to $7 a barrel less than the mercantile exchange price because of transportation, handling costs and because the oil yields less gasoline and other types of fuel than benchmark West Texas Intermediate.

"These prices are not just a luxury," said Richards, with the Illinois Oil & Gas Association. "Most of our producers need these prices."

If oil producers need inspiration, they need look no further than Ben Webster and his Deep Rock Energy LLC.

On March 16, 2002, Webster made Illinois' biggest oil find in decades. The company partnered with Ceja Corp., based in Tulsa, Okla., and drilled Warren No. 1, a $1.6 million wildcat that went 3,900 feet vertically and about 250 feet sideways under Forbes State Park.

Briefly, it was the biggest producing oil well in the lower 48 states at about 3,800 barrels a day. It made Webster a celebrity in his hometown of Salem, Ill. So far, the well and others drilled in the same field have produced more than 1.5 million barrels. It has benefited not only Webster and his family but 140 royalty owners, including the state.

Oilmen like Webster are optimists. They have to be. Even with advances in technology, a new well strikes oil about half the time. But the hunt becomes more worthwhile as crude prices climb higher.

"We love the oil business," Dee said. "We're thrilled to have the economics where we can drill. It's like looking at the end of the rainbow for the pot of gold."


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