New York Gov. Andrew Cuomo's recent decision to ban fracking shines a spotlight on the balancing act governments in potentially oil- and gas-rich regions face weighing economic benefits against environmental concerns.
The Democratic governor, who is set to begin his second term on Jan. 1, said in his Dec. 17 announcement that his decision was based on the New York State Department of Health's conclusion that fracking for natural gas cannot be done safely.
Former Gov. David Patterson first imposed a moratorium on gas drilling by high volume hydraulic fracturing in 2008 to allow a review of fracking's impact. Cuomo's move comes after he weighed the potential economic benefits drilling could bring to Upstate regions sitting atop the Marcellus Shale rock formation, along with protests from environmentalists concerned that fracking could damage water supplies.
"All things being equal, I will be bound by what the experts say because I am not in a position to second guess them with my expertise," said Cuomo during a the Dec. 17 cabinet meeting where the state announced the decision to not proceed with fracking. "It is a highly technical field that needs more information and less emotion."
New York State Department of Environmental Conservation Commissioner Joe Martens said in a statement that with an increasing number of localities that have enacted fracking bans and moratoriums, "the risks substantially outweigh any potential economic benefits."
While many Democratic leaders praised Cuomo's decision, New York State Republican Chairman Ed Cox issued a statement saying this was missed opportunity to capitalize on the recent popularity of fracking across the country. Cox argued that fracking is supported by President Obama and U.S. Sen. Charles Schumer, D-N.Y.
"Andrew Cuomo has given into the radical environmental Luddites in his own party to leave New York as the only one of 35 states with extractable natural gas to be missing out on the hydro-boom," said Cox. "While unemployment in New York's shale-rich Southern Tier remains high, safety regulated natural gas development has led to the creation of a quarter of a million new jobs across the border in Pennsylvania."
The ban won't factor in New York's credit rating, said Standard & Poor's Senior Director David Hitchcock, its lead analyst for New York State.
"We don't see the ban on fracking as having a significant credit impact for New York State," said Hitchcock. "It does not currently receive revenue from fracking, although it could close off potential future revenue growth from this source."
He added however that revenue derived from fracking is "significant" in other states like North Dakota and Texas.
The conservative-leaning Manhattan Institute for Policy Research estimated in a
"It would clearly make a difference for local governments both for the tax base and employment opportunities," said Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute and a former chief economist for the U.S. Department of Labor. "It's very sad that they are not going to benefit from this opportunity."
The Marcellus Shale is also situated underneath two-thirds of Pennsylvania and portions of Ohio and West Virginia. A report last year from Janney Capital Markets said jobs related to the Marcellus Shale in Pennsylvania peaked in early 2012 after receiving a temporary boost from increased gas drilling in 2010.
Pennsylvania lawmakers considered last year implementing a new severance tax for natural-gas production that would be paid by drillers based on the value of gas taken from a well.
Republican Gov. Tom Corbett objected to the idea, which was floated to help plug a $1.5 billion budget gap, but the proposal could get new life when Democrat Tom Wolf takes over Jan. 20.
Fitch Ratings and Standard & Poor's both downgraded Pennsylvania in September, but added that the state could benefit from continued development of Marcellus Shale natural gas deposits.
"Modifying or expanding revenues related to natural gas drilling could provide additional revenues but such changes are not the end all be all solution for Pennsylvania's budget stresses," said Janney Capital Markets director Tom Kozlik. "They can help but will not fill the budget gap for next year or future years alone."
New York's action to ban fracking contrasts with California, where Gov. Jerry Brown has declined to stand in the way of the process and legislation that would have banned it failed to advance in the legislature in 2014.
The state-affiliated California Council on Science and Technology
Though the move is expected to increase fracking in the massive Monterey Shale formation, a Aug. 28 Moody's report said the financial impact on state and local governments will be minimal since California is the only oil-producing state without a full-fledged severance tax in place.
According to the U.S. Census Bureau, the states that collected the most severance taxes from mineral resource drilling in 2013 were Texas, with $4.6 billion, Alaska at $4 billion, North Dakota with $2.5 billion, Wyoming at $868 million and Louisiana with $834 million.
Fifteen states had no severance tax while some like California only imposed a statewide assessment fee, which led to just $38 million being collected.
Shale natural gas production was estimated to have generated $18.6 billion in federal, state and local government taxes in 2010, according to IHS Global Insights.
"It expands the range of budget choices," said Jim Diffley, chief economist and senior director at IHS Global Insights, on the fiscal benefits fracking can deliver, "It gives them more flexibility with their budgets."
Marcy Block, senior director at Fitch Ratings, says severance taxes on gas drilling for certain states can be a help revenue wise, but for New York as is the case in many other states, it would have comprised a small component of state revenue.
Gas-drilling states where the severance tax helps aid the overall operating budgets include Wyoming, New Mexico and West Virginia, Block said. However, some states benefit in other ways economically such as Oklahoma, where about one out of every three jobs derive from the oil and natural gas industry.
"For some states severance taxes are very important," said Block. "For some states natural resources has been a part of the economy for a very long time."
