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Low-producing "stripper" wells a key to nation's energy supply Tuesday August 14, 2001, 05:20:04 PM

By BRAD FOSS

AP Business Writer

VINCENT, Texas (AP) -- Before laying to rest aging oil wells, Battlecat Oil and Gas helps them lead longer, more productive lives.

And in doing so, the fledgling company makes a vital contribution to America's energy supply.

Battlecat is one of the countless mom-and-pop companies that pays rock-bottom prices for low-volume "stripper" wells and squeezes out every last drop. In dribs and drabs, these wells produce 845,000 barrels of crude a day -- about one in every seven barrels produced domestically.

"It's the kind of thing you wouldn't miss until they were gone," said Fred Lawrence, director of economics for the Independent Petroleum Association of America in Washington. "The most important thing is to keep these wells alive."

Thanks to high petroleum prices, the number of stripper oil wells appears to be growing again after nearly a decade of decline. Still, small independent companies like Battlecat are hardly experiencing a windfall -- if anything, the cost of operating a well becomes more expensive over time, intensifying the challenge of getting a dwindling resource out of the ground profitably.

Last year Battlecat paid $45,000 for a broken oil pump and unused well in this arid West Texas outpost on a hunch it could be nursed back to health.

"I will take risks on smaller properties," said Battlecat co-founder Mark Semmelbeck, who started the company in 1999 with a college buddy after scrounging up $700,000 from their personal savings, friends and family members.

His willingness to gamble on the well, known as Walker "33" 1, is backed up by experience. Semmelbeck has a graduate degree in petroleum engineering and 15 years of experience at some of the biggest petroleum companies around, including Schlumberger Inc. and the former Enron Oil and Gas.

But healing Walker "33" hasn't been easy. For the first three months the only liquid to flow from the repaired well was briny water -- hundreds of barrels a day, each costing 50 cents in disposal fees. Then, after crude finally began to bubble up, the time-worn equipment crapped out repeatedly, adding $25,000 in unforeseen costs to the operation.

The well has fared much better lately, averaging more than 15 barrels of crude a day and 35,000 cubic feet of natural gas -- 50 percent more than its last owner was able to recover.

Semmelbeck believes there could be as much as 100,000 barrels of oil and 1 billion cubic feet of natural gas left in Walker "33," an amount that would take more than 15 years to extract at current rates.

"I've got a 10 percent chance that this well will make $1 million over its life," Semmelbeck said during a recent visit. "I think those are pretty good odds."

The Permian Basin of West Texas, where Battlecat and scores of other tiny companies scavenge for tiny deposits, was once considered prime oil and gas territory.

Over the past two generations, however, the productivity of the region tapered off. Wells belonging to major oil companies such as BP PLC and Texaco Inc. were sold off to ever smaller players as wells that had once flowed more than 100 barrels per day slowed to a trickle.

A stripper well is broadly defined as one that produces less than 10 barrels of crude or 60,000 cubic feet of natural gas per day. Nationwide, the average is more like two barrels of crude or 15,000 cubic feet of gas.

The crumbs that the oil giants pushed off their plates years ago sustain small independent operators in at least 28 states. And when petroleum prices are weak, as they were for much of the 1990s, the impact on these companies is harsh and immediate.

"When prices came down, your lifestyle contracted right with it," recalled David Pitts of Pitts Energy, a small independent oil company in Midland run by David, his two brothers and their father.

But while the Pitts family cut back personally, Pitts Energy took advantage of the situation by snapping up unwanted wells at cut-rate prices. It doubled the size of its portfolio between 1993 and 1999.

Today Pitts Energy is doing so well it is considering hiring someone from outside the family to help manage its 150 wells.

The number of stripper oil wells nationwide rose to 423,000 in 1999 from 419,000 in 1998, according to the latest figures from the Interstate Oil and Gas Compact Commission in Oklahoma City. But even with the recent rise, there are still 9 percent fewer stripper wells than in 1990.

The challenge for Battlecat and the others is to control their costs.

Standing beside the oil pump at Walker "33" as it rises and falls hypnotically, Semmelbeck rattles off his current monthly expenses: $860 for electricity, $250 for routine maintenance and $2,200 for water disposal. On top of that, he's had to repair the pumping rod several times over the past few months at $5,000 a pop.

"I've got to figure out why it keeps breaking," Semmelbeck said to no one in particular.

His other pressing need is cheaper water disposal. A college classmate from Texas A&M has promised to remove the water for 10 cents a barrel, a savings of 80 percent.

It will cost $15,000 to redirect the water through a new pipe, but Semmelbeck said doing so would enable Walker "33," one of a dozen wells owned by Battlecat, to be profitable by year-end.

David Griffin of Griffin Petroleum, a father-son company in Midland that owns about 30 properties in Texas, New Mexico and Louisiana, produces the equivalent of 400-plus barrels of oil and gas each day.

"We know some tricks about how to minimize the cost and maximize the production," said Griffin, an independent oil hunter since 1971.

The obstacles faced by stripper-well operators has not attracted much political attention over the years. In fact, the 170-page National Energy Policy unveiled by President Bush in May makes no mention of them.

The wide-ranging energy bill passed by the House this month includes a tax credit for stripper-well operators when petroleum prices are low. The industry views the tax credit as a safety net that would protect up to 70,000 low-producing wells from being shut down.

The oil industry is legendary for its booms and busts, and no one is more vulnerable to the swings than the small-time operators. So what's the appeal?

"It's much more of an entrepreneurial spirit," said David Pursell, a Houston-based investment banker with Simmons and Co. International, which finances petroleum projects. "People are in their garages dreaming of a 50-story glass tower in Houston."

Semmelbeck, who said he enjoys every minute spent tinkering with Walker "33", has big aspirations for Battlecat.

"We're on the bottom of the food chain, trying to scrape our way to the top," he said.

Battlecat recently paid $100,000 to lease 320 acres in Carlsbad, New Mexico, part of a natural gas field known as The Cemetery, an area Semmelbeck believes is not as bleak as it sounds.

"I think there could be as much as 10 billion cubic feet of gas there," he said.

But Battlecat is mainly on the prowl for dying wells that can be resuscitated

"If I can take a well and bring it from 5 barrels a day to 25 barrels a day," he said. "I'll jump on that."

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-- Martin Thompson (mthom1927@aol.com), August 15, 2001