Academic journal article Agricultural and Resource Economics Review

What Can We Learn about Shale Gas Development from Land Values? Opportunities, Challenges, and Evidence from Texas and Pennsylvania

Academic journal article Agricultural and Resource Economics Review

What Can We Learn about Shale Gas Development from Land Values? Opportunities, Challenges, and Evidence from Texas and Pennsylvania

Article excerpt

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Success in extracting oil and natural gas from shale formations through horizontal drilling and hydraulic fracturing has led to a wave of drilling in shale-rich states such as Texas and Pennsylvania. The consequences of drilling in shale formations are diverse, affecting jobs, property values, and health (Weber 2012, 2014, Hill 2013, Olmstead et al. 2013, Brown 2014, Gopalakrishnan and Klaiber 2014).

Several recent studies looked at the effect of shale gas development on residential housing values to estimate the cost of real and perceived environmental and human health risks (Muehlenbachs, Spiller, and Timmins 2013, Gopalakrishnan and Klaiber 2014). For residential properties, the real estate value primarily reflects the value of buildings but for farm properties, it mostly reflects the value of undeveloped land. The link between shale development (or the potential for it) and land values generally has not been explored. Just two studies have addressed it and then only tangentially. Weber, Brown, and Pender (2013) found a positive correlation between farm real estate values and lease and royalty payments from oil, gas, and wind activities while Borchers, Ifft, and Kuethe (2014) found a weak negative correlation between county-level oil production and farm-level pasture values.

We use self-reported values from five U.S. Department of Agriculture (USDA) Census of Agriculture (1992, 1997, 2002, 2007, and 2012) to estimate how natural gas development affected farm real estate values for two regions that had extensive shale gas development as of 2012: the Barnett shale in Texas and the northeastern part of the Marcellus shale in Pennsylvania.

We first use the estimates as an indication of the ubiquity of "split estates"- properties for which the oil and gas rights have been severed and are not owned by the land owner. Split estates matter because the person bearing the disamenities from drilling is not the one who negotiates the terms of the drilling lease. As extracting natural gas from shale formations becomes increasingly profitable, oil and gas rights will increase in value and we thus expect that property values will appreciate more in areas in which there are relatively few split estates. And when split estates are common, local residents capture little of the royalties generated by extraction of the minerals.

We then use our long panel data to see how farm real estate values changed during leasing and development periods. As natural gas is withdrawn, subsurface rights grant access to a continually shrinking resource, causing properties with subsurface rights to also decline in value. A decline to less than the pre-development level would indicate a long-term cost of wells and related infrastructure built on or near the property if farmers do not invest their royalty incomes in improving their land. We estimate a medium- to long-term net effect on property values. Our data set does not permit us to separate competing positive and negative effects of drilling, and the farms are observed at five-year intervals so our estimates primarily reflect effects that persisted for several years. Consequently, the estimates are not comparable to those of studies that estimate short-term changes in real estate values (from shortly before to shortly after drilling of a well).

Lastly, we leverage the data to see how drilling affects the suitability of land for various uses. Residential values, which were considered in earlier research (e.g., Gopalakrishnan and Klaiber 2014, Muehlenbachs, Spiller, and Timmins 2013), reveal how drilling affects a property's attractiveness for use as a home. Larger parcels reveal how drilling affects suitability for the nonresidential purposes that give them value. An example is a 100-acre property that includes a house and a barn and is used both as a residence and for crops, livestock, and recreation. Because of its potential impact on local water quality, drilling may reduce the value of land dedicated to livestock but not the value of land planted to crops. …

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