Valuation of Unconventional Oil and Gas Development

Abstract

Public discourse regarding the local economic, environmental, and socio-cultural impacts of unconventional oil and gas development has been intense, especially in those areas of the country that are relatively unfamiliar with extractive industry. At the center of this debate is the contrast between the economic and financial benefits that accrue to local governments and landowners versus the environmental and socio-cultural costs borne by the public-at-large. Understanding how local citizens value unconventional oil and gas development is an important policy consideration for federal, state, and local governments. The overarching theme of this work, consisting of three manuscripts, seeks to contribute to the debate regarding the impacts of energy consumption and development. In two manuscripts, I use the hedonic valuation approach to value the benefits and costs of shale gas and oil development. I do this through the context of a statewide moratorium on development in New York and a long-standing severance between the surface and mineral estates in the western Colorado property market. My results indicate that homebuyers significantly value both the financial benefits and environmental costs of unconventional oil and gas development. In Manuscript 1, I find that New York properties that were most likely to experience the financial and environmental impacts of Marcellus Shale development decreased in value by 23% as a result of the moratorium, which under certain assumptions indicates a large and positive net valuation of development. In Manuscript 2, I find that the homebuyers have large and significant valuations of the environmental costs of development on the order of 35% of sale prices for those properties that have an unconventional well within a mile of the property’s extent. In my third manuscript, I again apply hedonic valuation and value the benefits and costs of silica sand mining in western Wisconsin. The great increase in the application of hydraulic fracturing in oil and gas production has led to an increase in demand for silica sand. This type of sand is an important ingredient in hydraulic fracturing. Silica sand mining has a number of local benefits and external costs. I use the hedonic valuation methodology to value sand mining’s impacts, focusing on property views and local air quality. I find strong evidence that both changes in view and air quality are negatively capitalized into housing prices. I also find evidence of appreciation for those properties that are not as subject to those environmental quality changes.