'Shale Revolution' May Damage Residential Tax Bases

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DALLAS — Many state and local governments are enjoying an economic lift from gas drilling, but the long-term impact on property tax values is an open question, according to researchers, particularly where drilling takes place in residential areas.

Slideshow: Fracking the Tax Base

"The potential for exposure to shale gas development to hurt property values is not just an econometric curiosity; rather, it is beginning to show up in the way housing markets on shale plays operate," according to a January report from the National Bureau of Economic Research.

"While there are valid arguments on both sides of the debate surrounding shale gas development, the question of whether the benefits outweigh the costs has not yet been answered," the study concluded.

The study authored by Lucija Muehlenbachs, a fellow with the nonprofit Resources for the Future, Beia Spiller of the Environmental Defense Fund and Christopher Timmins of Duke University based conclusions on the values of thousands of properties across 36 counties in Pennsylvania and New York from 1995 to 2012.

"We show that it is not a simple story of everyone winning or everyone losing," Muehlenbachs said. "For example, while there are temporary regional benefits from drilling, it turns out that the presence of undrilled wells that were permitted more than a year ago has a negative effect on property values."

Nationwide, property appraisals are still recovering value lost in the Great Recession of 2008, according to the National League of Cities. Property tax revenues fell 0.4% in 2012, marking the third straight year of decline and were projected to fall in 2013, though less sharply.

Among those who have warned for years about the downside of the "shale revolution" is Elizabeth N. Radow, a New York attorney who authored a 2011 report for the New York Bar Association.

"Residential fracking carries heavy industrial risks, and the ripple effects could be tremendous," Radow wrote. "This shift of drilling risks from the gas companies to the housing sector, homeowners and taxpayers creates a perfect storm begging for immediate attention."

In a special report in December, Standard & Poor's sorted some of the "winners and losers" in the shale revolution, which the ratings agency said was in its fifth year.

"Cities and counties' tax bases could experience volatility because of their increased reliance on one particular industry," analyst Lauren Spalten noted.

Spalten cited the example of Karnes County, Texas, which has seen its assessed property values grow nearly eightfold from $400 million to $3 billion in five years. Like other counties in the Eagle Ford shale play of South Texas, Karnes is coping with an influx of workers and the need to provide schools, roads and services to the increased population.

In a state with 481 ghost towns and 1 million oil and gas wells, the boom cycle often prompts worries about the next bust.

According to a new federal forecast, U.S. oil production is expected to peak in 2016 before leveling off and beginning to taper in 2020.

Raymond James & Associates reported recently that capital spending for the biggest U.S. producers likely will fall next year after several years of growth.

Economist Ray Perryman said that, while an energy bust is possible if natural gas prices were to fall, the current world market for the commodity makes that less likely, "and it would take a perfect storm to generate another bust of the mid-1980s magnitude."

"Cities should be careful not to overextend to deal with the infrastructure strain presented by the influx of oilfield personnel and related businesses or to assume tax increases will endure," said Perryman, founder of the Perryman Group in Waco, Texas. "We have consistently cautioned cities in the areas where we have worked to use these funds wisely."

Karnes County represents the traditional boomtown model, where workers and equipment race to the resource, often in remote and desolate areas of the world.

In contrast, the so-called "shale revolution" has brought drilling rigs, workers and political upheaval to settled suburbs and cities with diverse economies where homeowners expected to enjoy quiet, leafy neighborhoods.

"They're just drilling everywhere," said Sharon Wilson, a Texas anti-fracking activist who said she sold her $230,000 Wise County property in the Barnett Shale for $150,000 after drilling began. "And it's no longer in unpopulated areas. Even if you're one who believes the fumes are not harmful, they're not pleasant."

In a residential area of Fort Worth near a freeway, a 2.93-acre natural gas production site has been devalued on the tax rolls 97%, from $328,094 in 2009 to $8,868 in 2013 according to the tax rolls available online at the Tarrant County Assessor's Office. Across the street from the well, which is hidden from view and operates quietly, the values of modest brick homes built in the 1970s have fallen about 11.5% during that time to the upper $60,000 range.

In the college town of Denton north of Dallas and Fort Worth, the city council is considering a petition to limit hydraulic fracturing amid spirited protests. The petition coincides with plans to call for a bond election in November, when the anti-fracking initiative would also appear, if certified by the city council.

"There has been a lot of discussion about regulating gas wells," said Bryan Langley, Denton's chief financial officer. "Some don't feel like the city has gone far enough on that."

Nationally, shale development has not been a topic of concern for the Government Finance Officers Association, executive director Jeffrey Esser told The Bond Buyer.

Denton straddles a line of drilling operations that are heavily concentrated in Tarrant County, including Fort Worth, to the southwest. To the southeast, the city of Dallas has passed restrictions, prompting threats of lawsuits from oil interests.

Dallas-Fort Worth International Airport, halfway between the two cities, halted use of an injection well for wastewater after a series of mild earthquakes last year. DFW was one of the earliest sites of Barnett shale exploration, earning the airport over $300 million profit in the past five years.

In the town of Azle, northwest of Fort Worth, homeowners were so disturbed by the earthquakes that they packed a meeting hall to confront the Texas Railroad Commission, which regulates the exploration, production, and transportation of oil and natural gas in Texas.  In a concession to the protesters, the Railroad Commission agreed to hire a seismologist.

Kathy Zellman, an Azle real estate agent, said she has felt only one of the dozens of earthquakes recorded in the area. Property values have not seemed to suffer any harm, she said.

"I have not had anybody say they were selling because of the earthquakes," Zellman said. "I do agree that they probably need to do something about those injection wells."

Records from the Tarrant County Appraisal District report that the average market value of a home in Azle in 2013 was $125,915, up about 3.3% from 2012 but still about 1.3% below the 2008 peak. Analysts point out that tax appraisals lag the real estate market by about 18 months at a minimum.

For homeowners, fracking could represent a windfall if they own the mineral rights to their property. However, in Texas and other western states, those rights are more commonly severed prior to the sale.

Scott Tinker, director of the Bureau of Economic Geology at the University of Texas at Austin, said his sister lives in Fort Worth and actually does draw royalties from well operations on her property. Often, well sites are so unobtrusive that neighbors aren't even aware they exist, Tinker said.

"The big macro value is positive," Tinker said of the shale plays. "Texas has benefitted tremendously.  Down on the community level, there are plusses and minuses."

Langley said that income from gas production in Denton makes up only about 1.5% to 2% of tax revenue.

"It's not as substantial as you might think," he said. "We do receive royalties. We also have some (drilling) on parks lands and the royalties there go only toward parks projects."

In 2008, Fort Worth received $50 million in revenues from 44 shale gas wells. In 2012, the city received only $23 million from 397 wells, according to Deborah Rogers, founder of Energy Policy Forum and former member of the advisory council of the Federal Reserve Bank in Dallas.

Phyllis Wolper, a Denton real estate agent who supports the anti-fracking initiative, said that buyers bought houses in a new subdivision not knowing that there were plans to reopen old vertical wells as hydraulic fracturing operations. With fracking, a single drilling pad can support as many as eight horizontal wells.

The drilling operations sometimes run 24 hours with constant vibrations, lights, noise and fumes, she said.

"If you have a number of owners who sell out to get out of there because it's impacting their health, the only way to sell is to sell very cheap," she said. "Subsequent sales are going to be cheaper, so their property taxes are going to be impacted."

In nearby Flower Mound, a study by Integra Realty Resources commissioned by the city found that residential homes valued over $250,000 that were immediately adjacent to well sites could lose 3% to 14% in value.

Even Rex Tillerson, chairman and chief executive of ExxonMobil, is claiming that his $5 million home and horse property in the neighboring Denton County town of Bartonville is threatened by potential fracking operations. In a lawsuit that includes former House Majority Leader Dick Armey and other wealthy neighbors, Tillerson is seeking to have a 160-foot water tower dismantled. Tillerson appeared personally before the Bartonville town council last November to protest the water tower that the lawsuit claims could be used to supply water for fracking operations.

The plaintiffs claim in the lawsuit that the tower will harm their property values and the rural character of the town.

"This monstrosity will mock the purpose of the Bartonville zoning ordinance, the primary purpose of which is to protect the citizens and their property from uses 'detrimental to or endangering the public health, safety, morals, comfort, or general welfare," the suit maintains.

A University of Denver survey of attitudes in December found a 5% to 15% decrease in hypothetical bid value of homes near fracking. About 75% of Texans told the DU researchers they would not be interested in buying a house exactly like their current home if it depended on well water and was located a quarter mile from a drilling rig. Two out of three Floridians and Alabamans surveyed also said they would lose interest in buying.

A homeowner's source of water was the critical factor in the National Bureau of Economic Research study. Piped-water properties within 1.5 kilometers of a fracking site actually gained $8,954 in value, the study found, but that included homes where the mineral rights came with the property. The average annual loss for groundwater-dependent homes within 1.5 kilometers of a well was $33,214.

"These losses, when multiplied by the number of affected houses, may be quite important in terms of property tax revenues for local governments," the study said.

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