Shale Gas Development and Property Values: Differences across Drinking Water Sources

Shale Gas Development and Property Values: Differences across Drinking Water Sources by Lucija Muehlenbachs, Elisheba Spiller, Christopher Timmins, September 2012, NBER Working Paper No. 18390. You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

While shale gas development can result in rapid local economic development, negative externalities associated with the process may adversely affect the prices of nearby homes. We utilize a triple-difference estimator and exploit the public water service area boundary in Washington County, Pennsylvania to identify the housing capitalization of groundwater risk, differentiating it from other externalities, lease payments to homeowners, and local economic development. We find that proximity to wells increases housing values, though risks to groundwater fully offset those gains. By itself, groundwater risk reduces property values by up to 24 percent.

Shale gas boom makes some Pennsylvanians richer — and some poorer by Brad Plumer, October 31, 2012, Washington Post
In recent years, states like Pennsylvania have seen a massive natural gas boom as improved drilling techniques have allowed companies to extract natural gas from shale rock in the Marcellus. The boom has helped drive U.S. natural gas prices down to stunningly low levels and has upended the country’s energy sector. But how does it affect the people living in those regions?

But there are risks, as well. Scientists are still trying to assess whether drilling for shale gas — through a technique known as hydraulic fracturing, or “fracking” — can contaminate nearby groundwater. … If the well casings are faulty, or if fracking occurs too close to aquifers, either chemicals or methane could conceivably contaminate nearby drinking water. … Ideally, in trying to craft regulations around gas drilling, state governments would try to balance those risks against the benefits. So far, however, those risks have been fairly difficult to quantify. That’s what makes this new NBER working paper by Lucija Muehlenbachs, Elisheba Spiller and Christopher Timmins so interesting. The authors try to look at how shale-gas drilling has affected property values around drilling sites in Pennsylvania. Doing so, they say, can help give a better sense of how to tally those upsides and downsides.

The authors looked specifically at Washington County, just southwest of Pittsburgh. And after running a variety of statistical tests and controlling for as many relevant variables as they could, they found that proximity to a well has a fairly large effect on nearby property values. A property near a drilling pad gets a 10.7 percent boost in value, on average — presumably reflecting the benefit of those lease payments from gas companies.

But the story didn’t end there. Properties that depend on groundwater, meanwhile, take a large home-value hit — up to 24 percent — if they’re within 2,000 meters of a new well. This decrease in value, the authors argue, is one way to quantify the perceived risks of groundwater contamination. And for some properties, the downsides of groundwater risk may currently outweigh the upsides from having a well nearby: “To the extent that the neteffect of drilling on groundwater-dependent properties might even be negative,” the authors write, “we could see an increase in the likelihood of foreclosure in areas experiencing rapid growth of hydraulic fracturing.”

Now, the authors are very careful to note that this paper is far from the final word on natural-gas regulations. (Property values are only one slice of the economy, and there are other environmental considerations, like air pollution, that aren’t studied here.) But it does suggest that there’s an economic case for more careful oversight of groundwater contamination risks. [Emphasis added]

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