Tuesday, January 14, 2014

The Housing Market Impacts of Shale Gas Development

Using data from New York and Pennsylvania and an array of empirical techniques to control for confounding factors, [the authors] recover hedonic estimates of property value impacts from shale gas development that vary with geographic scale and water source. Results indicate large negative impacts on nearby groundwater-dependent homes, while piped water-dependent homes are positively impacted by proximity (although by a smaller amount), suggesting an impact of lease payments. At a broader geographic scale, [they] find evidence that new wellbores can increase property values, but these effects diminish over time. Undrilled permits, conversely, may cause property values to decrease.
Schematic depiction of hydraulic fracturing for shale gas
In 2000, shale gas accounted for 1.6 percent of total US natural gas production; this rose to 4.1 percent in 2005, and by 2010, it had reached 23.1 percent (Wang and Krupnick, 2013). Natural gas from the Marcellus formation currently accounts for the majority of this production (Rahm et al., 2013) and can be attributed to advances in hydraulic fracturing, horizontal drilling, and 3-D seismic imaging.
Upon signing their mineral rights to a gas company, landowners may receive two dollars to thousands
of dollars per acre as an upfront “bonus” payment, and then a 12.5 percent to 21 percent royalty per unit of gas extracted.
In all cases, the difference-in-differences (DD) estimate of the Groundwater Contamination Risk (GWCR) effect based on these estimates is negative. In the case of the 1.5km treatment buffer, the DD estimate is large (-16.7%) and significant at the 10% level.
The results ... imply that adding an extra well within 1.5 km causes groundwater homes to depreciate by 3.4%, (although an F-test reveals that the summation of these two effects has a t-stat of -0.7 and thus is not statistically significant at 1.5 km) with -10% being due to the risk of groundwater contamination, and +6.6% due to the positive impact of lease payments and other adjacency impacts. However, it is interesting to see how the effects differ as we change the size of the adjacency buffer. Very near the well (within 1 km), we see much larger negative impacts and insignificant positive impacts, where the summation of the two coefficients implies a statistically significant drop of 16.7% (t-stat of -4.19) for groundwater-dependent homes.
For groundwater-dependent (GW) homes, the negative impacts of adjacency are large when the property is very close (1.5 km or closer) to a shale gas well, and 37 become more negative the closer a home gets to a shale gas well. [The authors] find that the costs of groundwater contamination risk are large and significant (ranging from -10% to -22.4%), suggesting that there could be large gains to the housing market from regulations that reduce the risk. In the most recent year of our data (April 2011 to April 2012) the average annual loss for groundwater-dependent homes within 1.5 km of a well was $33,214.34 The average annual loss for GW properties is larger than the average annual gain for piped-water properties within 1.5 km of a shale gas well ($8,954).35 These losses, when multiplied by the number of affected houses, may be quite important in terms of property tax revenues for local governments, which could potentially justify costly regulation to diminish groundwater contamination risk. Furthermore, it is important to keep in mind that our estimates do not fully capture the total costs associated with groundwater contamination risk. Owners of groundwater-dependent homes may purchase expensive water filters to clean their drinking water when faced ith a shale gas well nearby; whole home filters can cost thousands of dollars 36. Since [they] do not capture adaptation costs, our estimates are therefore a lower bound of the actual costs incurred by homeowners located near shale gas wells, implying that contamination risk reduction can have very large benefits to nearby homes.


by Lucija Anna Muehlenbachs, Elisheba Beia Spiller, Chris Timmins
Resources For the Future (RFF) www.RFF.org
RFF Discussion Paper 13-39; December, 2013

35. This is calculated using properties that have access to piped water, are within 1.5 km of a well, and are sold in the most recent year of our data. If we also include properties within 2km of a well and include coefficients from column 6 for properties within 1.5km and 2km of a well, the groundwater losses are larger on average but have a smaller total loss (i.e., the average loss for GW homes within 2km of a well is $15,774 compared to gains for PWSA homes on average of $8,940).
36. These water filters can cost about $1,480/year for a family of four (http://www.ezclearwater.com/wordpress/tag/whole-house-water-filtration-system/). Given the cost to adjacent groundwater dependent homes is $33,000, this implies a yearly cost of approximately $1,500, which aligns with the price of installing a filter to clean the drinking water.

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