Technological improvements in the extraction of natural gas from shale rock have transformed the industry.
- Shale gas under the populated northeast US were thought to be uneconomical less than ten years ago, but now contribute a major share of US gas supply.
- In 2000, shale gas accounted for 1.6% of total US natural gas production. This rose to 4.1% in 2005, and by 2010 it had reached 23.1% (Wang and Krupnick 2013).
Natural gas has been hailed as a bridge to energy independence and a clean future because of its domestic sourcing and, compared with coal and petroleum derivatives, a smaller carbon footprint and lower emissions of other pollutants (e.g. particulates, sulphur dioxide, carbon monoxide, and nitrous oxides). Furthermore, proponents note that jobs associated with shale gas development will boost local economic growth (Weber 2012).
Yet opposition to unconventional methods of natural gas extraction has emerged. Opponents cite:
- The potential for damages from methane leakage (Howarth et al. 2011, Hultman et al. 2011, Burnham et al. 2011);
- Water contamination (Osborn et al. 2011, Olmstead et al. 2013);
- Local air pollution (Kargbo et al. 2010, Schmidt 2011, Howarth et al. 2011); and
- Increased congestion from truck traffic (Bailey 2010, Considine et al. 2011).
New evidence on property values
Properties surrounding shale gas development may experience growth or decline in value depending on whether the local benefits of the activity outweigh the costs. To pin this down, our recent research uses transaction records obtained from CoreLogic of all properties sold in 36 counties in Pennsylvania and seven border counties in New York between January 1995 and April 2012 (Muehlenbachs et al. 2014). We find that the property value impacts depend on:
- The property’s drinking water source,
- Distance to the wells, and
- Timing of the drilling.
We find strong evidence of negative net impacts on the prices of properties dependent on private water wells located near shale gas development. Specifically, groundwater-dependent houses within 1.5 km of shale-gas wells lose 3.4% of their value after a well is drilled. These negative impacts become more pronounced the closer the house is to the well – the change reaches -16.7% within 1 km.
For properties with access to piped water from public water sources, the situation is a bit different. In particular, we find evidence that these houses experience small net gains (6.6%) on average at a distance of 1.5 km, likely because royalty payments made to homeowners for the mineral rights offset other costs of proximity (such as pollution or traffic congestion). However, those benefits tend to disappear for homes within 1 km of a well, likely because the negative effects of proximity outweigh any benefits from lease payments. Furthermore, we find evidence of visual externalities associated with well drilling, as the benefits of proximity appear only for wells that are not visible from the house (as determined using computer viewshed technology).
Using the differences between prices for properties with and without access to piped water, we isolate the component of the negative impact specifically attributable to groundwater contamination risk, and find that this can vary between 10% and 22% of the house value, depending upon the distance from the home to the well. This implies very large impacts from groundwater contamination risk (or the perceptions thereof), and potentially important benefits from regulations diminishing this risk.
Methodologically, it can be hard to control for confounding effects (i.e. unobservable aspects of the home that are correlated with the impacts of shale gas development). In particular, royalty payments to landowners are not present in readily available data, but are important in the US. We also do not have access to data on other kinds of pollution, such as air, light, noise, and traffic congestion. Without controlling for the influence of these other factors, it is difficult to directly measure the impact of groundwater contamination risk.
In order to deal with these correlated unobservables, we take a multipronged approach and use a variety of quasi-experimental techniques. First, we use data on repeat sales of individual properties. This controls for any unobservable attributes of properties or their neighbourhoods that are fixed over time, and that may be correlated with distance to a shale gas well. Second, we limit our analysis to a narrow range around the boundary where the public water service areas and groundwater-dependent areas meet. This allows us to eliminate time-varying unobservables associated with location that may differ across water source. Third, we use a ‘treatment-control’ strategy, similar to that used in medical studies, where we consider groups of houses that should be similar to one another, except only some receive the ‘treatment’ of being exposed to nearby fracking. Finally, we conduct a ‘triple difference estimation’ by measuring how the relative changes in prices across the treatment and control groups differ for groundwater-dependent houses and piped-water houses.
At a broader geographic scale (i.e. the impact of shale gas wells within 20km of a property), we find that drilling has a small positive impact on property values, likely through the boost to the local economy of increased activity. However, undrilled well permits, particularly those that have been permitted for more than a year, can offset these benefits. This is likely due to undrilled permits creating an aesthetic disamenity (e.g. through the clearing of land), but could also be from the loss of the option value of signing a more favourable mineral lease in the future. Furthermore, there is some evidence of a boom-bust cycle, as the benefits of development to property values appear to fade over time.
These results are particularly representative of the economic impacts of extensive shale gas development in light of the fact that the area studied overlays the Marcellus shale gas play, the largest in the US. The policy implications are large – groundwater homes lose on net from shale gas development, especially if they are very close (the average annual loss for groundwater-dependent homes in 2012 was approximately $33,000). Thus, there could be very large gains to these properties from policies that reduce or eliminate the risk of groundwater contamination. Similarly, reducing non-groundwater-related externalities would allow piped water homes to fully benefit from lease payments (on average, their net benefits were estimated to be around $9,000 per home in fiscal 2012, although lease payments could potentially be much larger than this amount).
In regions where homeowners do not own their mineral rights, such as in the UK, where the government owns the rights, homeowners would have no offsetting gains from lease payments, and, therefore, even those with access to public water may see net losses. In cases like these, our analysis would suggest even bigger costs for houses dependent on private groundwater sources. At the county level, we find increases only within the year that a well is drilled indicating that the boom-bust nature of shale gas development could result in negative consequences for the region once extraction decreases. Given the amount of future extraction that can occur worldwide, the effect on property values has important implications for understanding the benefits and costs of a large-scale shift towards energy from shale gas.
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Considine, T J, R W Watson, and N B Considine (2011), “The economic opportunities of shale energy development”, The Manhattan Institute, June.
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Olmstead, S, L Muehlenbachs, J-S Shih, Z Chu, and A Krupnick (2013), “Shale gas development impacts on surface water quality in Pennsylvania”, Proceedings of the National Academy of Sciences, 110(13): 4962–4967.
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Schmidt, C W (2011), “Blind rush? Shale gas boom proceeds amid human health questions”, Environmental Health Perspectives, 119(8): a348.
Wang, Z and A Krupnick (2013), “A retrospective review of shale gas development in the US”, Resources for the Future Discussion Paper.