Department of Environmental and Natural Resource Economics

Andy Boslett

University of Rhode Island

Email: aboslet1@gmail; Phone: (607) 329-8089

Title: Shale Gas Development and Mineral Rights: A Hedonic Valuation of Environmental Costs of Drilling in Western Colorado

Keywords: Hedonic Valuation; Shale Gas Development; Mineral Rights; Split Estate

Overview

Public discourse regarding the boom in domestic shale gas and oil development has focused on the dual application of horizontal drilling and hydraulic fracturing technologies. However, a key but understated driver of domestic shale development is the country’s decentralized mineral estate policy. Unlike other countries in Europe and elsewhere, private individuals in the United States can own and manage subsurface minerals. Since the holder of a property’s mineral estate can financially benefit from drilling due to royalty payments on production and lease signing bonuses, there is generally more public support for energy development in this country than in countries where the government has retained ownership.

However, a property’s surface estate can be severed from its mineral estate. A split estate occurs when the surface landowner does not hold the mineral estate to the property. Since mineral rights are the dominant estate, surface owners in a split estate situation cannot financially benefit from energy production on the land, nor can they preclude the mineral estate owner from accessing the property. Thus, understanding who owns the mineral estate has considerable implications on the local wealth impacts of shale development (e.g., Fitzgerald, 2014).

Methods

In this study, we exploit oil and gas lease data, mineral estate ownership data, and a rich set of residential property transactions from northwestern Colorado, as well as southwestern and northeastern Pennsylvania to understand the welfare implications of ownership of the mineral estate. We analyze the residential property market using the hedonic valuation methodology, building off earlier work by Boslett et al. (2014), Gopalakrishnan and Klaiber (2014), and Muehlenbachs et al. (2014) that also applied the hedonic valuation method to understand valuation and perceptions of shale gas development. However, to our knowledge, we are the first study to control for mineral rights ownership in a hedonic framework while also distinguishing between the welfare implications of those that can and those that cannot financially benefit from shale development.

Using mineral lease and ownership data from the Bureau of Land Management and drilling info, we differentiate the perceived financial benefits of shale development from its potential environmental costs by analyzing sale price variation between full estate and split estate properties. We primarily rely on robust fixed effects models, though we also incorporate difference-in-difference and instrumental variable models to support our analyses.

Results

Initial analyses of the sale price of split estate properties in Colorado indicate that split estate properties near recent shale gas development activities sell for a significant discount relative to those far away from wells. These results are robust across a number of econometric specifications and subsets of the data. Initial results of our Pennsylvania analyses using lease data from Drillinginfo indicate similar results for split estate properties, though our estimates are not as robust across specifications.

Conclusions

This work builds on earlier work by Gopalakrishnan and Klaiber (2014) and Muehlenbachs et al. (2014), both of which focused on understanding how people react to shale gas development. Their analyses found a mostly negative relationship between housing prices and nearby shale development, which would indicate that home buyers may perceive that the environmental and social costs of energy development are greater than its financial benefits. However, their work did not explicitly control for ownership of the mineral estate, which could be an important omitted variable. In this paper, we use data on mineral rights ownership in order to better isolate perceptions of the environmental costs of nearby energy development from its financial benefits. Our initial results corroborate the results from the earlier works, lending further support to the argument that shale development can depress the sale price of nearby properties relative to those further away.

Works Cited

Boslett, Andrew, Guilfoos, Todd, and Corey Lang. 2015. “Valuation of Expectations: A Hedonic Study of Shale Gas Development and a Statewide Moratorium.” In Review.

Fitzgerald, Timothy. 2014. “Mineral Rights and Royalty Interests: Importance for Rural Residents & Agricultural Producers.” Montana State University. Working Paper.

Gopalakrishnan, Sathya, and H. Allen Klaiber. 2013. “Is the Shale Energy Boom a Bust for Nearby Residents? Evidence from Housing Values in Pennsylvania.” American Journal of Agricultural Economics, 96 (1): 43-66.

Muehlenbachs, Lucija, Elisheba Spiller, and Christopher Timmins. 2014. “The Housing Market Impacts of Shale Gas Development.” NBER Working Paper No. 19796.