Andy Boslett
University of Rhode Island
Department of Environmental and Natural Resource Economics
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-indifference 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.