DALLAS -- Since the "fracking boom" began, earthquakes in the oil and gas producing regions have prompted debate among industry and academic experts as to the cause.
From a credit perspective, the cause of the earthquakes is less significant than the impact, according to a new report from Standard & Poor's. In the first ratings agency analysis of the widespread implications of possibly "man-made earthquakes," S&P sees potential damage to homeowners, insurance companies, mortgage providers and municipalities in the populated areas where drilling typically occurs.
New practices involved in hydraulic fracturing of shale formations, often in urban and suburban settings "haven't just altered the physical backdrop," the report said. "They've also altered credit trends across the country. The earthquake trend has and will continue to have sharp economic consequences for home and business owners, mortgage lenders, insurance companies, and investors exposed to real estate in earthquake affected areas."
While the S&P research focused primarily on industry credits, the risk filters down to municipal bond issuers such as cities, counties and school districts in the form of property assessments, tax revenues, enforcement issues and lawsuits.
"We believe policymakers also need to consider the credit implications regarding fracking when they develop laws and regulations," the report said. "Any new policies or guidelines could help determine credit outcomes in the long-term, given fracking's revenue potential, as well as the risks."
In their 2015 legislative sessions, lawmakers in Texas and Oklahoma banned local ordinances to halt fracking within city limits. The state laws were reactions to a local ordinance in Denton, Texas, passed in a referendum that halted fracking in the city north of Dallas and Fort Worth.
In Ohio, the state ordered seismic-risk assessments before issuing more fracking permits. New York banned fracking outright.
Recent reports in Texas and Oklahoma have attributed scores of earthquakes to injection wells used to dispose of toxic waste from fracking operations.
Oklahoma experienced one or two earthquakes a year before 2008 and the introduction of fracking, the report noted. That number suddenly grew to 20 in 2009, 42 in 2010, and 585 in 2014. That is nearly triple the earthquakes in seismically active California. If earthquakes of magnitude 2 or less are included, Oklahoma had 5,000 in 2014 alone.
The Oklahoma Geological Survey said in April 2015 that it now "considers it very likely" that many of the earthquakes in Oklahoma were in fact "triggered by the injection of produced water in disposal wells."
"Whatever the cause, we believe the potential for property damage from increased incidences of earthquakes may be a liability for the energy and insurance industries, lenders, property owners, and real estate investors," said Andrew Foster, the lead analyst on S&P's Aug. 5 report.
On July 28, operators shut down two wastewater injection wells in northern Oklahoma and reduced operations at a third after several earthquakes centered in the town of Crescent 35 miles north of Oklahoma City. The quakes were recorded along a 50-mile fault line, geologists said.
Oklahoma Corporation Commissioner Matt Skinner said the wells were shut down voluntarily. In February, the commission ordered an injection well closed after a magnitude 4.1 earthquake near the Kansas border.
The Commission, which regulates the oil and gas industry in the state, recently announced plans to place more than 200 disposal wells under scrutiny.
In the Dallas-Fort Worth area, dozens of earthquakes have rattled the area since hydraulic fracturing began in the Barnett Shale region. A study by Southern Methodist University seismologists attributed the cause to injection wells.
"It's unclear who will be liable in any given circumstance," S&P said. "However, future risks clearly exist. At present, U.S. homeowners don't widely hold earthquake insurance, and it's generally not a lender requirement. Therefore, insurers' potential exposure is relatively small, while owners and lenders are uninsured against this risk."
Despite the soaring earthquakes and plummeting oil prices, drilling activity continues at hundreds of sites. At a meeting of the Oklahoma City Board of Adjustment last month, homeowners voiced concerns about their property values, but were unable to stop the approval of 12 new wells planned by a Texas company.
In June, fracking operations resumed in Denton after Gov. Greg Abbott signed House Bill 40, overturning the city's local ordinance. The bill allows local governments to fight fires and regulate noise and other nuisances stemming from the operations. However, the state has done little to respond to complaints of chemical fumes reported at the drilling sites.
In the face of falling prices, oil and gas production increased in June in the Bakken Shale region of North Dakota and the Eagle Ford Shale of South Texas, according to industry reports.
S&P also noted the credit risks from the lower prices. West Texas Intermediate crude closed below $44 per barrel on Aug. 7, about $64 lower than its June, 2014 high of $108 per barrel.
"Falling energy prices are affecting a slew of sectors, including commercial and residential mortgage lenders, who must now adapt as property-value dynamics shift," the report said. "These shifting fortunes also result in the potential for declines in state and municipal tax revenues, the potential effects on corporate credit quality, and other signs of a slowdown in the energy industry's boom."
The impact of prices is expected to fall hardest on states such as Oklahoma and North Dakota that have less diversified economies than other producing states such as Texas and California.
"For the most part -- particularly during the Great Recession -- the recent U.S. energy boom has been a net positive," analysts said. "The growth in the energy sector has brought prosperity to corners of the country where little previously existed by reshaping local economies and luring workers from thousands of miles away with the promise of well-paying jobs. Revenues increased for energy companies and property values and populations grew, all adding to revenues for various municipalities."
In hopes of boosting prices, the oil industry is in the midst of a major campaign to get the export restrictions lifted on energy produced in the U.S. The Federal Energy Regulatory Commission has permitted six liquefied natural gas export terminals around the country. Two in Texas are under development at Freeport and Sabine Pass. Others are planned in Louisiana, Maryland and Oregon.
