FORMER MENACE BRINGS NEW ECONOMIC BOOM

By Leonard R Allen
Kansas Country Living Magazine
July 2004

Decades ago devastation, explosions and hardship used to be the legacy of coal-bed methane gas for coal miners in Kansas. This deadly byproduct of coal meant the mines had to be ventilated releasing the gas into the atmosphere for safety. However, in the early 1980’s the mining industry realized the gas could be contained and sold for use in homes for space heating, water heating and cooking.

Coal mining in Kansas hit its peak during World Wars I and II. Today only a single small mine still produces coal as an energy source in Linn County. However, the southeastern portion of the state is beginning to see a new economic boom from the once dismissed gas.

According to Public Information Circular 19, produced by the Kansas Geological Survey, “Coal-bed methane now accounts for about seven percent of the total annual gas production in the United States.” The majority of the activity to this point has been in the southeastern part of Kansas. This recent production brings with it new economic advancements for the area.

Quest uses various sizes of trenchers to lay pipelines connecting all wells to the main distribution line.  This trencher can cut 3,000 to 5,000 feet per day.  Crews follow closely behind and inspect the pipe for damage one last time before covering the trench and healing returning ground almost to its previous condition.

Doug Lamb, director, president and chief operating officer of Quest Resource Corporation, said, “I think our positive economic impact on southeast Kansas has been better than any other business in the area.” Quest is focused primarily on the production and transportation of natural gas in the 500-square-mile region of southeast Kansas that is served by its gas pipeline network. With its recent acquisition of Devon Energy Corporation’s “Devon” oil and gas leases, pipelines and related assets in the Cherokee Basin, Quest has taken over the lead in pipeline construction and well production in the area.

Quest’s impact on the local economy of the area is prominently visible from the full diners in Thayer, Kansas, where production is currently centered, to the equipment, materials and vehicles purchased in the area.

Kelly Welsh, head supervisor of construction, said, “We buy everything we can from people and businesses in the area. This company has been going on forever and we are going to be here for a long time and we like keeping the people in the area happy.”

Each of the pumps are electrically powered and Quest has called upon the area electric cooperatives to provide the power needed to keep the operation running smoothly. Lamb said, “We’ve spent a lot of time in Radiant Electric’s area. They’ve done an outstanding job getting service to us and keeping it going. We’ve got a bunch of positive history with Radiant.” He added, “Now that we are working into Twin Valley’s service territory they are about to get a bunch of history with us too. The cooperatives have been good to us.”

Ron Holsteen, general manager of Twin Valley Electric Cooperative in Altamont said, “Twin Valley is just beginning to experience a significant growth in the number of electric services for new gas wells in our service area. Just last week we staked a couple of dozen new services and expect to have many more in the upcoming months. Quest is drilling 144 test wells in each township in about 6 townships in our area.”

“ That’s going to be a huge load for us,” Buck Cunningham line superintendent at Twin Valley said. “With as many wells as they are drilling we expect about 50 meters each with a 5 kilowatt load.”

The usage will be good for the cooperative’s members beyond the impact on the local economies, jobs created and royalty checks paid to landowners. The new service to the wells has required new line and equipment upgrades to provide service. These improvements have been paid for by the companies needing the new service and not the other members of the cooperatives.

The extra load should also positively impact electric rates for the co-op. Cunningham said, “This represents a good load for us because it’s pretty much constant and it lasts year-round. This can help keep rates low for a considerable amount of time.”

The economic benefits of the coal-bed methane gas production can be quite lucrative for the landowners as well as the cooperatives.

Tim Carr, chief of petroleum research at the Kansas Geological Survey said, “If you own a section of ground, it could mean $100,000(in royalties) per year. For smaller farmers, it could mean $10,000 or $20,000 per year. It would be enough to keep the farm going, because it is cash money.”

Where did the gas come from?
Coal forms from plant material that was accumulated in ancient swamps and bogs at rates fast enough to prevent decay. Upon burial, the material is first converted to peat. Through time, as temperature and pressure increase with further burial, peat is converted to coal (it takes about 10 feet of peat to make 1 foot of coal).

Large quantities of methane-rich gas are generated and stored within the coal. Coal can store surprisingly large volumes of gas, up to six or seven times as much gas as a conventional gas reservoir (typically sandstone or limestone) of equal rock volume. The amount of gas in coal depends on the degree of alteration the coal has undergone in the burial process, the depth below the surface, and the pressure of the reservoir.

Coal-bed gas is mainly composed of methane (CH4), the principal constituent of natural gas. Coal-bed methane is what geologists call a sweet gas because it typically contains very few impurities such as hydrogen sulfide, nitrogen, or carbon dioxide, all normally found in natural gas. Coal-bed methane, when burned, generates as much heat as petroleum-based natural gas.

Kansas is a major gas producing state producing almost twice as much natural gas as is consumed. In 2002, Kansas produced more than 450 billion cubic feet of gas, which is down significantly from peak. However, with increased wellhead prices, the decline in Kansas gas production appears to have slowed significantly.

The increased contribution of Kansas coal-bed methane production appears to be contributing to stabilizing Kansas natural gas production. Coal-bed methane (C.B.M.) production extends back to wells drilled during the late 1980’s and 1990’s and even to wells of the early part of the twentieth century. More than one half of the more than 1,300 coal-bed methane wells in eastern Kansas have been drilled during the last three years.

Carr said, “This is a remarkable drilling boom that ranges throughout eastern Kansas from Oklahoma to Nebraska. While a small component of total gas production, CBM production in Kansas has doubled from 2002 to 2003, and will increase significantly in 2004.” He added, “All those pumps use electrical power which will help level out the highs and fill in the lows of electrical usage.”

Lamb said there have been no real negative environmental effects attributed to the production of the gas. “The biggest concern is the salt water we pump out of the ground with the gas but it gets pumped back into the ground through disposal wells that are twice as deep as the production wells.”

Pumping the water back into the ground puts it back where it came from, keeping it from becoming an environmental hazard.

Quest goes to great lengths to be sure that mature wells fit into their surrounding environment. All of the equipment and fencing left by Quest is painted a two-toned brown color that makes it blend into the background to keep it from becoming an eyesore. Welsh said, “We always clean up our site when we are done and make them user friendly for the landowners. If they have cattle we fence the pumps in, we rock all of our roads so they stay clean and serviceable and we take as many steps as we can to make the landowners happy.” He went on to say, “These people have helped us to grow and the better we get along with them the better we will all do.”

With Quest’s 5-year construction plan and with the average well producing for about 10 years, coal-bed methane gas production is projected to benefit the economy of southeast Kansas, the people and the cooperatives for a very long time.

Quest Resource Corporation is focused primarily on the production and transportation of natural gas in the 500-square-mile region of southeast Kansas that is served by its gas pipeline network. Note:  News releases and other information on Quest Resource Corporation can be accessed at http://www.qrcp.net. 

Opinions, forecasts, projections or statements other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. Forward-looking statements in this announcement are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results may differ materially due to a variety of factors, including without limitation: the uncertainty involved in exploring for and developing new oil and gas reserves, the sales price of such reserves, environmental issues, competition, general market conditions, and other risks detailed in the Company's filings with the Securities and Exchange Commission.