Kroll: Fracking in the Northeast a Credit Positive

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Proposed high-volume hydraulic fracking of the Marcellus and Utica Shale Basins has the potential to improve economic conditions for states and local governments in the region, which could lead to higher credit ratings, according to a recent report from Kroll Bond Ratings Agency.

The shale formations are located below New York, Ohio, Pennsylvania, and West Virginia.

“KBRA views the ongoing development of the Marcellus and Utica shale formations as having the potential to create significant number of new jobs (direct and indirect), as well as improving economic conditions and tax revenues for the state and local governments that lie above the boundaries of the basins,” analysts Gary Krellenstein and Brittni Smith wrote in the report.

Kroll’s primary concern in its ratings evaluations is an issuer’s ability to make timely payment on their financial obligations.

“Solely from this perspective, the economic and revenue enhancements from fracking are likely to lead to higher credit ratings over time,” analysts wrote.

Projections of the potential revenues and financial impact vary depending on the source, but even low-end estimates indicate material improvements in financial positions, analysts said.

Using an estimate of $4 per thousand of cubic feet, for example, revenues from just the sale of shale gas could add over $20 billion to the region’s economy in the year 2020.

Kroll said that states could use the projected additional tax revenues to enhance current economic positions and to set aside funds for future generations, both of which would have positive potential rating implications.

While fracking could result in economic improvements, it also raises environmental and political issues. There are concerns over the contamination of clean water from the processes used to recover and treat shale oil and gas, as well as concerns about air pollution, the release of radioactive material, and other health-related issues.

“Ideally, each state should identify and evaluate the environmental costs and economic benefits of racking within their state,” analysts said.

Ohio, Pennsylvania, and West Virginia support fracking and are in various stages of developing the industry, but New York banned fracking in 2008, pending further analysis.

“The implications for New York State and its municipalities, which are among the largest issuers in the tax-exempt market, remain in flux at this time,” analysts said. “Even if the fracking ban is lifted, the extreme opposition that has emerged with the state may limit or prevent development of this natural resource.”

Kroll analysts said that until more information is available in each of the states, they cannot assess the impact of fracking on state and local budgets, but will continue monitoring the situation as it progresses.

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