RPT-Fitch: US Municipal Water Credits at Risk from Potential Fracking Contamination, Competition & Costs

Tue May 6, 2014 9:27am EDT

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May 6 (Reuters) - (The following statement was released by the rating agency)

Fracking could potentially harm local water supplies, causing significant financial stress for U.S. municipal water utilities, according to a new Fitch Ratings report. Potential contamination, diminished water supplies and infrastructure and costs pressure due to fracking could, in the worst case scenarios, cause severe and precipitous credit deterioration.

'Contamination could be a major setback for local utilities as water sales would cease immediately,' said Douglas Scott, Managing Director. 'While the cost of clean-up is significant in itself, restoring public confidence in the water supplies may take much longer.'

'Fracking can be an economic boom for some communities, but its introduction or expansion in unprepared areas could create competition for already-scarce water resources in the case of drought, or place undue stress on the existing water infrastructure in areas that experience rapid population growth.'

Despite some state regulations requiring oil and gas companies to disclose the chemicals used during fracking, these regulations are subject to the federal disclosure laws, which exempt disclosure of certain chemical composition that may be deemed trade secrets. Even if specific chemicals are disclosed, they may not be on the list of regulated contaminants and, as a result, may go undetected during testing and treatment.

Crude oil production in the U.S. increased 32% between 2011-2013. Approximately 90% of total oil production in the lower 48 states is produced in six shale plays spanning 15 states and 271 counties, via both fracking and conventional well technology. Utilities located in those areas face higher risk for contamination than others, and that risk is likely growing as the use of fracking technology is becoming more prevalent.

With 56% of hydraulically fractured wells located in regions experiencing drought, fracking could leave utilities competing for water supplies. The amount of water used for fracking could be significant in communities already dealing with water scarcity, like those located near the Eagle Ford shale play in south Texas.

In addition, the rise of fracking boom towns could pressure local utilities as they are forced to meet the demands of a growing population over a short period of time. In the long-term, a diminished population of ratepayers could be forced to finance the utility's expanded debt after fracking operations decrease.

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