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  • rlp2451 rlp2451 Jan 19, 2013 9:17 PM Flag

    OT (Unfortunately for LINE): Utica. Marcellus Could Hold $10 Trillion In Investment

    Executive Summary
    This update examines the proposed high-volume hydraulic fracking of the Marcellus and Utica Shale Basins, located below New York, Ohio, Pennsylvania, and West Virginia, as it relates to state and local credit risk.

    KBRA views the ongoing development of the Marcellus and Utica shale formations as having the potential to create a 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.

    These improvements could support higher credit ratings for issuers in the affected areas, as they reflect key credit characteristics #$%$ed by KBRA in its rating review for state and local governments. Currently, Ohio, Pennsylvania and West Virginia support fracking and are in various stages of developing this industry. New York banned fracking in 2008 pending further analysis. Until there is more available information and experience in each of these states, KBRA cannot #$%$ the impact fracking will have on state and local budgets. However, it will continue to monitor developments in the industry and take rating actions as appropriate.

    If fully developed, these (recently economically) recoverable natural resources could represent in excess of $10 trillion in additional domestic economic activity. In addition, development of shale oil and gas could also allow the U.S. to greatly reduce its dependence on imported foreign oil and enhance national security.

    The estimated economic impact from the recovery of these fossil fuel resources is so large that many economists predict it could materially reduce unemployment and add to the nation’s GDP for decades.

    It could also lead to a domestic revitalization of the plastics, pharmaceutical, fertilizer, manufacturing and other industries that need access to low cost energy and/or fossil fuel feedstock.

    Current estimates indicate that there could be trillions of dollars in new wealth generated from the recovery of domestic shale formations. In fact, many economists say that fracking will soon fundamentally shift global economics to uniquely benefit the United States.

    The focus of this particular KBRA report is not on the national implications but on potential changes to municipal finance stemming from the development of the Marcellus and Utica shale formations (see map on cover), located in the Northeast.

    Studies on the Marcellus and Utica basins have indicated that, combined, these two shale formations have the potential to become one of the biggest producers of natural gas in the nation. Ponderosa Advisors, an oil and gas consulting firm, recently projected that daily gas production (see charts on the following page) from Marcellus and Utica could grow from 4.2 billion cubic feet (Bcfd) in 2010 to 15.4 Bcfd by 2020. (Production in the Rockies, including Williston, are forecast to grow from 9.6 Bcfd in 2010 to 9.9 Bcfd in 2020).

    If these projections are even remotely accurate, development of the shales could result in the creation of thousands of new jobs in Pennsylvania, Ohio, West Virginia and New York. Indeed, Wood Mackenzie predicts that the shale gas industry could support over 300,000 jobs in those four states by 2020.

    At $4/MCF (thousand cubic feet), revenues from just the sale of shale gas could add over $20.0 billion to the region’s economy in the year 2020.

    If the indirect benefits from higher employment, increased tax revenues and improved infrastructure are added, the overall economic impact could be far greater. A recent study by IHS-Global/Cambridge Energy Research, a major energy consulting firm, states that drilling
    added $4.1 billion to Ohio’s GDP and $911.0 million to its tax revenues in 2012. This could climb to $18 billion and $4.6 billion, respectively, by 2020.

    All these new gas and oil riches have not gone unnoticed and many states could use the projected additional tax revenues both to enhance their current economic positions and/or set aside funds for future generations. Either of these would have positive potential rating implications.

    North Dakota, which is now the second largest producer of oil in the U.S. due to the fracking of Bakken formation in the southwest corner of that state, created a Legacy Fund in 2010 and expects to have $1.3 billion set aside by mid-2013.

    Utah voters just approved a new constitutional amendment requiring the placement of up to half of new energy revenues into a trust fund. And similar ideas have been raised in Pennsylvania, Ohio and West Virginia, as well as several other states.

    An often cited example of how these funds can benefit states and their municipalities is the Alaska Permanent Fund, which pays cash to residents ever year ($878 in 2012) from energy taxes and royalties, and also helps the state to subsidize non-fossil fuel power sources such as the Bradley Lake Hydro project.

    Created in 1975, Alaska’s fund is now over $40.0 billion. Several other states, such as Texas, Wyoming, and New Mexico, also have large trust funds.

    But far and away, the world’s largest fund is Norway’s, worth approximately $650 billion.
    Norway established The Petroleum Fund’s Advisory Council on Ethics by royal decree in 2004 to set standards for the fund’s use. Accordingly, the Ministry of Finance issued regulations on the management of the Government Petroleum Fund that include ethical guidelines. State-sponsored funds, managed using ethical guidelines similar to Norway’s, could help to ameliorate some of the opposition to fracking. A portion of the funds’ earnings could even be specifically earmarked for environmental enhancements.

    Of the four states sitting above the Marcellus and Utica shale formation, New York is the only one that currently bans high-volume hydraulic fracturing. Fracking is probably the biggest environmental question, and most contentious issue, currently facing Albany. New York’s decision is being closely watched nationally.

    The State has taken a cautious approach in an attempt to ensure that science is the primary consideration when measuring the costs and benefits of fracking. The fracking issue is politically complex and many laud the governor’s “lets hold off till we know more” position and believe the ban enacted in 2008 was prudent. But the pressure placed on him, both by industry and others, is tremendous, as is the allure that fracking could bring jobs and tax revenues to an economically
    struggling region of the State. In August, Mayor Michael Bloomberg gave his support to “safe fracking”.

    And the issue even came up in the 2012 presidential debates, in which both candidates supported fracking Expectations were that the DEC would lift the 4½ year ban by the end of February 2013, and require far more stringent regulations and permitting requirements. However, the ban may be extended while the state awaits the results of a newly appointed health review board. New York will also need time to develop the infrastructure required to adequately monitor fracking activities in the State if the ban is lifted. If done carefully, fracking could be of significant economic benefit to New York and many of its western municipalities.

    Even if approval is given by the DEC, few in the industry expect to see a NY shale boom in the near term such as that occurring in Pennsylvania. The new regulations and permitting process will be far more complex and the DEC will almost certainly maintain a moratorium on any fracking near either the New York City or Syracuse watersheds. Given the significant capital investments needed to develop these resources (an IHS study predicts nearly $1.9 Trillion in shale gas capital expense between 2010 and 2035 on a national basis), the industry is likely to take a slow approach, fearing legal challenges; court imposed injunctions on permitting and a well-organized amalgam of grass root organizations opposed to any fracking even with far more stringent environmental requirements.

    What remains unclear is if New York has set an example of a high regulatory bar that should be emulated by other states before allowing high-volume fracking to begin. However, even if the ban is lifted with far more stringent regulation, the State may have become so polarized that that fracking never becomes economically viable in New York and the potential economic benefits are never realized. Further complicating the picture is the role local governments will play in this process. Dozens of New York communities have enacted bans on drilling, which the industry says are invalid, stating that only the State can regulate oil and gas development..

    “Fracking is happening and it’s not going to stop, so we have to take the high road of good regulation and taxes so communities are better off, not worse off, after it’s done,” stated Ted Boettner, executive director of the West Virginia Center on Budget and Policy in a USA Today article.

    Barring any new adverse findings, it appears that the vast majority of states will go forward with high-volume hydraulic fracturing. The International Energy Agency forecasts that over the next few years the U.S. will become the No.1 producer of natural gas and oil in the world, overtaking Russia and Saudi Arabia, respectively.

    This trend should have a significant positive credit impact on most of the states (and several of the
    municipalities within them) that are able to go forward with high-volume fracking, including Ohio,
    Pennsylvania and West Virginia. Oil and gas production is regulated and taxed almost entirely by state and local governments. The federal government’s role is largely advisory, except on federal lands and on interstate pipelines (see page 7 of our report dated January 13, 2012, for a ranking of the states potentially impacted).

    While the inflow of revenues from fracking could materially enhance the economic profile and tax collections of a large number of states and municipalities, KBRA will also take into account the potential environmental and mitigation costs, which in some locations could significantly offset or even exceed the economic benefits from fracking.

    Some of the environmental costs of fracking are subjective in nature making it far more difficult to quantify and ascertain the costs of mitigating them. A stronger local economy, increased tax revenues, and more jobs may not always translate into a better “quality of life” for residents living near newly erected fracking facilities. KBRA’s primary consideration in our rating 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.

    Projections of enhanced revenues and the financial impact from the development of the Marcellus and Utica Shale vary significantly depending on the source cited. The Pennsylvania Department of Community and Economic Development posts on its web page that recoverable gas just in Pennsylvania could exceed $500 billion

    Even low-end estimates indicate material improvements in financial positions and ability to make
    debt service payments. Although the confidence intervals surrounding these estimates vary significantly, all three states, Ohio, Pennsylvania and West Virginia, and many of the municipalities located within them, could see improvements to their financial positions and ability to meet debt obligations over the next few years.

    The implications for New York State and its municipalities, which are among the largest issuers in the taxexempt market, remain in flux at this time. Even if the fracking ban is lifted, the extreme opposition that has emerged within the State may limit or prevent development of this natural resource. KBRA will closely monitor the development (or lack) of shale oil and gas resources in New York.

    For additional information please contact Kroll Bond Ratings, New York Office, 845 Third Avenue
    Fourth Floor, New York, NY 10022
    (212) 702 0707

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    • How does one get to $10 trillion. Easily. Too bad some people's peabrains can't think outside the box.

      Call Kroll and ask them but it isn't hard to get to the ten trillion.

      But here are a couple hints:
      Multiply 300,000 jobs times the annual average salary in an oil job, then times twenty years.

      Multiply the infrastructure investment times the same number of years,

      Then take the value of the products and include that amount.

      Then take the velocity of money and multiply the above amounts by that.

      Don't forget to include royalty and lease payments, tax revenues, pipeline/transportation revenue, end product revenue (throughput from NGL processing facilities, refineries, potential NG exports), etc.

      Ten trillion is likely an underestimate. But I suspect you can't count that high. And that's all I'm saying about it.

      • 4 Replies to rlp2451
      • What amazes me (and should disappoint others here) that posting good news such as this is dismissed and trashed by naysayers on this board. People should have high hopes for the natural gas and oil plays in the Northeast, but instead they find reasons not to be enthusiastic about it, find fault with potential great resource for a significant segment of the US, improving the GDP not only of the states involved but the entire country, yet those short-sighted individuals claim that it can't be true, doesn't exist, and won't happen. Sounds like a couple of Al Gore supporters to me.

      • I forgot to tell you to add the dividends, distributions and capital gains from the companies investing in the area. For example, one company alone generates $1B per year in distributions. I'll let the peabrains see if they can figure out which one. But it isn't even the biggest.

      • on:
        "How does one get to $10 trillion. Easily. Too bad some people's peabrains can't think outside the box. "

        ........a peabrain is someone who just merely restates the premise & tosses in a personal dig and expects readers not to notice that you just avoided doing the actual math...AGAIN....but instead think that we might just believe it because you told us to....LOL

        More RLP-routine.....SO, instead of checking by figuring it out after all the numbers are even provided (except the added economic activity numbers) but you were told where to get that too.....

        Not too good at estimating?

        Need to rely on other's reports without the Red Queen nonsense you posted that THREE SA (Filloon) articles then did not want to check that either....right?

        One must wonder why...

        Just too much effort, too dificult, don't want to ask the author to check since a poster said that the numbers do not add up AFTER using the USGS recoverable reserve estimates...

        ....maybe they used the old numbers before they were adjusted 80% downward for Marcellus by USGS in 2011 or 2012?

        .......don't you think you should find out?

      • "How does one get to $10 trillion. Easily. Too bad some people's peabrains can't think outside the box?"

        High expensive regulations meant to hinder production not insure responsible production along with high taxes on a commodity selling below the cost of production is going to generate $10 trillion how in a state like this?!

        RLP has no shame therefore no self worth so of course it is incapable of respecting for other people.

    • You can post and repost all the reports you like...but the numbers do not add up.

      You can check it easy enough but you avoided the USGS numbers for recoverable reserves for the Marcellus & the Utica that i posted.....I realize that it is easier to just post some report and hope that it is believed...but if you do the math....the numbers do not even come close.

      Look at this part of your post for example:
      At $4/MCF (thousand cubic feet), revenues from just the sale of shale gas could add over $20.0 billion to the region’s economy in the year 2020.

      If the indirect benefits from higher employment, increased tax revenues and improved infrastructure are added, the overall economic impact could be far greater. A recent study by IHS-Global/Cambridge Energy Research, a major energy consulting firm, states that drilling
      added $4.1 billion to Ohio’s GDP and $911.0 million to its tax revenues in 2012. This could climb to $18 billion and $4.6 billion, respectively, by 2020. do you get to $TEN TRILLION from that?

      That report by a bond rating company....estimated a number that is about 2/3 of the entire USA GDP....and is based on a bunch of what ifs, maybe this some the qualifying language in the post.

      Let us know what you calculate after you use the USGS reserve numbers to show just how off the report's numbers actually are....or,

      ........ if you can't do the math to check....send ALL of the threads to the report-writer with the USGS reserve quantities and ask them to apply the USGS reserve estimates and to check the basis for their report number of $Ten Trillion because some do not see it as credible.

      Lets see some numbers....not merely what someone hopes might happen.

      • 2 Replies to sandonthebeach47
      • To help make the value estimate easier....this info is about how much is there in the area and the recoverable reserve estimate.

        From the USGS webpage:

        The Utica Shale contains about 38 trillion cubic feet of undiscovered, technically recoverable natural gas (at the mean estimate) according to the first assessment of this continuous (unconventional) natural gas accumulation by the U. S. Geological Survey. The Utica Shale has a mean of 940 million barrels of unconventional oil resources and a mean of 208 million barrels of unconventional natural gas liquids.

        The Utica Shale lies beneath the Marcellus Shale, and both are part of the Appalachian Basin, which is the longest-producing petroleum province in the United States.

        Marcellus is at 84 TCF of natural gas, is the largest unconventional gas basin USGS has assessed.

        Now, you can just add up the TOTAL recoverable reserves and multiply by a unit value for oil &/or gas.......and estimate the aprox total value....and what do you get?

        Use $4 or $5/MCF for gas...or even $6 if you like
        Use even $100/Bbl for oil

        You pick whatever you like for NGLs....

        Add it all up and what total do you get?

        Then estimate all related and even slightly related economic activity?

        If you need some help estimating that, there are a few good places that I found but the Univ. of TX at Austin looks like one of the best resources.

      • Hi Sand,

        RLP did it again. Found useless mindless stuff to post on the board.

        BUt it knows how to do investments. Really - he and another stuffed the ballot box so it must be true.

    • If natural gas is currently being sold below the marginal cost of production - which it is and why rigs have fallen off -

      What clown would assume regulations meant to hinder operations and higher taxes would be the high road rather than the mechanism which drives the jobs and economic activity to a more common sense and fair minded state?

      Clearly this person does not understand there is so much natural gas in America it is a commodity, responding to free market economics.

3.60+0.30(+9.09%)11:59 AMEDT