Valuation of the External Costs of Unconventional Oil and Gas Development: The Critical Importance of Mineral Rights Ownership

Abstract

We quantify the externalities associated with unconventional oil and gas development using hedonic valuation. One complication in determining local impacts is that some but not all properties are unified with mineral rights, which enable the residents to financially benefit from drilling, and this information is typically unobserved by researchers. To overcome this issue, we exploit the mineral severance legacy of the homestead act extensions of the twentieth century to identify properties in western Colorado that do not have mineral rights and are therefore only impacted negatively by drilling. We find housing prices decline about 35% when drilling occurs within 1 mile. Treated properties are affected by highly intensive drilling (∼16 wells drilled within a mile, on average), and there is suggestive evidence of nonlinear impacts on a per-well basis. Our estimate of local costs is larger than those found elsewhere in the literature, which demonstrates the critical importance of mineral ownership.