Record oil prices draw more interest in Tennessee drilling

By PAM SOHN
Chattanooga Times Free Press

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WARTBURG, Tenn. (AP) -- The rising price of crude oil has entrepreneurial oil companies drilling and prospecting the Tennessee mountains for black gold.

A Canadian oil company in recent months dug a new $8 million well in the Highpoint community of Morgan County near Wartburg and Oak Ridge.

"This was a science project, but with oil at the price it is, oil companies are willing to take a bigger risk," said Dwayne Tyrkalo, president of Montello Resources Ltd. USA and the leader of the company's "Tennessee project."

"Fifteen years ago, a barrel of oil brought $12. Now it brings $100," Tyrkalo said.

Neither Tyrkalo nor Montello CEO Bill Cawker specified what the new well, one of the state's deepest at more than 9,500 feet, has yielded. But the findings are promising, they said.

"This area (the Southern Appalachians) is good for oil because the movement of the mountains millions of years ago has caused fractures that trapped oil," Tyrkalo said recently, standing near the wellhead.

Bill Goodwin, spokesman of the Tennessee Oil and Gas Association, questioned Montello's secrecy about the drilling as well as prospects for hitting big oil at Highpoint.

"I don't think they have anything," he said.

Some links from Montello's Web site feature investor blog quotes comparing Tennessee's prospects to becoming "the little Texas," but Morgan County Executive Becky Ruppe is not persuaded oil drilling in the region pays off.

Morgan and other East Tennessee counties get too little severance tax money from gas and oil industry to pay for the damage the drillers and pump trucks cause to county roads and other infrastructure, she said.

Since July 2006, records show, Morgan County received almost $36,270 in oil severance tax and about $93,160 in gas severance tax. That is 0.2 percent of the county's total revenue during the same time period, records show.

"The severance tax (received) seems small compared to the value of the oil," Ruppe said. "There's a lot of concern among the residents. They feel like the oil and gas companies are raping our counties (in East Tennessee) and we don't get anything from it."

Judy Simms, who makes her living by measuring the oil tanks of about 10 wells to determine when the product needs to be picked up, estimates that most landowners who lease their land and have slow but steady wells realize about $10,000 a year in income from them.

Morgan County's recent oil history is what attracted Montello and other oil drillers.

In 2002, a well one and a quarter miles south of the company's experimental well gushed from the ground with such high pressure that it blew out the rig and eventually caught fire.

More than 500 barrels an hour of light crude oil, the equivalent of 12,000 barrels a day for two days, flowed from the well during the blowout before it could be capped, according to records.

Environmental officials ordered the well closed and the grounds reclaimed.

But the blowout sparked new speculation about a large reservoir of oil in the earth beneath the Cumberland Plateau.

"The mountain range here, the underground, is like a windshield that's been fractured," Tyrkalo said. "What is intriguing is that those fractures have built up so much pressure here. The oil has migrated closer to the surface. In some places the oil has migrated just about to the surface, and you'll see some oil-stained rocks."

The key, oilmen agree, is finding the oil's source. That's what prompted Montello to turn what started as a simple test well into a deep-earth experiment.

"There's a reason why there's so much pressure at a shallow depth," Tyrkalo said.

Near the bottom of the well, he said, drillers found "burnt volcanic oil. ... It was there millions of years ago, and it has migrated somewhere. If you can find that migrating stream, there's large amounts."

The company recently leased 190 acres in the area, according to company news statements, and began a second, shallower well nearby. Montello plans to encircle the area of the 2002 gusher with similar shallower wells.

"We have to do some more investigation," Tyrkalo said.

Montello, a publicly traded company listed on Canada's TSX Venture Exchange, also recently began drilling ventures in Alberta. But the company is just one of several working quietly in the Appalachian Mountains of East Tennessee, according to state environmental regulators.

Mike Burton, head of oil and gas activities for the Tennessee Department of Environment and Conservation's Division of Water Pollution Control, said oil and gas companies seeking permits to drill new wells in the Volunteer State in 2007 were at the highest peak since the end of the 1980s American oil boom.

"We approved 417 permits last year, 386 the year before that, and it has steadily increased in the last few years," he said.

The American oil industry collapsed in 1985, he said. For years after that "the economy was not right for looking for new sources of oil" in this country, he said.

"Now with a barrel of oil pricing at over $100, these (new drillers) basically are responding to the market," he said.

State regulators have had no problems with Montello's work, he said. The company has taken over management of 34 Tennessee wells and drilled two, Burton said.

Because of the depth of Montello's first test well, state regulators required a $5,000 plugging bond fee rather than the normal $2,000 bond fee, he said. Drillers also must put up a $1,500 site reclamation fee.

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