by Zheng Lu

 

Hydraulic fracturing, a process that extracts oil and natural gas from underground rock formations, is a process utilized to increase oil and gas yields. In nature, gas and oil are not typically found in underground caverns. Instead, these energy sources are found in the pore spaces of underground rocks. In order to reach these sources to produce oil or gas, a well needs to be drilled into the rock formation so that the oil or gas can be retrieved. The hope is that the gas or oil from the rocks flows into the well from the surrounding rock and then up the well to the surface (Hall).

Fluids flow easily through rocks which have a high permeability. However, if interconnections between pores in the rocks are too narrow or there are too few pores, permeability is low. Extracting oil or gas from these rock formations is not economical using conventional methods. Fracturing, a method in which cracks or fissures are created in the underground rock formations, gives oil or gas additional paths to flow through (Hall).

The first instance of fracturing occurred in the 1860s and was known as explosive fracturing. In explosive fracturing, an explosive charge, a “torpedo,” is lowered into the well. The resulting explosion fractures in surrounding rock and significantly increases the rate of oil or gas production compared with the production prior to fracturing (Hall).

In the 1940s, the process of hydraulic fracturing was developed. Unlike explosive fracturing, hydraulic fracturing does not use explosive charges. Rather, water at high pressures is pumped into the rock formations. The high pressure causes fractures in the rock formation and the water flowing through increases the size of the fractures. In order to prevent the fractures from “closing” when the pressurized water is removed, proppants – small particles such as sand, ceramic, or sintered bauxite – are used to prop open the fractures. These proppants are mixed into the fracturing water before being pumped into the rock formation. Water carries the proppants into the fractures and leaves them behind. Due to the high permeability of the proppants, oil and gas extraction are not impeded. Fracturing fluid consists of around 99.5 percent water and proppants (Hall).

The hydraulic fracturing process has been used in more than a million wells since the process was developed in the 1940s.  It has been used in low permeability rock formations and in coal-beds in order produce coal-bed methane. In recent years, hydraulic fracturing has received more notice due to its use in the production of oil and gas from shale, a process which has only become economical with the advent of horizontal drilling (Hall). In 2000, shale gas provided around 1 percent of the natural gas supply in the United States. By 2011, shale gas accounted for nearly 25 percent of the natural gas supply (Hagström and Adams 95).

In 2010, shale gas production in the United States amounted to around 5 trillion cubic feet. Projections by the U.S. Energy Information Administration show that production will triple by 2035 (Boersma and Johnson 571). “Early-adopters” of hydraulic fracturing: Texas, Oklahoma, and Pennsylvania, have emphasized the economic development, job creation, and state income associated with drilling. Other states such as New York, Delaware, and Vermont, have emphasized environmental concerns from polluted drinking water, anthropogenic seismicity, and the large carbon footprint created (Boersma and Johnson 572).

Shale gas is a relatively clean fuel when compared to coal or oil, releasing a lower amount of greenhouse gases when used as a source of energy. Hydraulic fracturing combined with horizontal drilling have made the production of natural gas commercially viable in many sites across the country. One advantage of allowing hydraulic fracturing is the creation of jobs. The development of the Marcellus Shale in Pennsylvania has added more than 100,000 jobs in 2011 and generated over $10 billion for the state’s economy (Simmons). Residents in areas where fracking is utilized may also be entitled to a royalty payment of around 12.5%-21% per unit of gas extracted (Muehlenbachs, Spiller and Timmins 3).

Another advantage lies in the fact that electricity generation utilizing natural gas instead of coal produces about half the carbon dioxide and less than a third of the nitrogen oxides. Sulfur oxides released by natural gas total less than 1 percent of those produced by coal. Unlike “clean” sources of electricity such as solar and wind, natural gas can be used to produce energy on demand based on consumer needs (Olson). Due to the reduced greenhouse gas emissions of natural gas, it can be effectively used as a “bridge fuel” until alternative clean sources of energy become more efficient and widespread (Durham Environmental Affairs Board 16).

However, there are some drawbacks to the process as well. One key disadvantage to hydraulic fracturing is the potential for a negative impact on the water supply of an area. Water is heavily used throughout the entire process of hydraulic fracturing. According to the EPA, approximately 90% of the injected fracking fluid is composed of water. Estimates of water usage range up to 13 million gallons required for shale gas production. Acquiring the amount of water required for fracking might limit the amount of water available for other uses. Even if enough water remained after withdrawing the necessary requisites for the process, the water quality may be negatively affected (US Environmental Protection Agency 14).

The injection of the well with fracking fluid also could have potentially harmful results to the water supply, as there could be an accidental release of the fluid due to a well malfunction. The fracturing fluid could also migrate into water aquifers underground as a result of the induced fractures intersecting with existing natural faults (US Environmental Protection Agency 17). During the flowback portion of hydraulic fracturing, the pressure in the wells is reduced. As a result, the fluid returns to the surface as wastewater. In addition to the components of the fracking fluid, wastewater can also contain hydrocarbons and other natural products of oil. Wastewater is typically stored onsite in pits of tanks. Potential leakages could also result as a consequence of improperly built or maintained sites. Finally, wastewater disposal could be another source of water supply contamination. (US Environmental Protection Agency 19).

Air pollution is always a large concern when looking at the oil and natural gas industry. The opening of a new well requires a range of equipment and construction. As a result, wells are typically a large source of volatile organic compound emissions. These compounds contribute to the formation of ground-level ozone, or smog. Wells are also significant producers of methane, a greenhouse gas about 20 times more potent than carbon dioxide. Benzene, ethylbenzene, and n-hexane, which are known as air toxics, are also produced by wells (Basic Information: Emissions from the Oil & Natural Gas Industry).

North Carolina is rich in many different natural resources. However, the state has little experience in dealing with petroleum or gas extraction. As a result, there has not been much regulation concerning shale gas. The Mesozoic basin, formed 225 million years ago, runs through the state of North Carolina. Durham County lies in the Piedmont physiographic province. Technological advances have made it economically feasible to exploit the gas reserves in the Piedmont (Durham Environmental Affairs Board 4-5).

The shale formations that lie underneath most of the lower half of Durham County are shallower when compared to the formations in other states such as Pennsylvania, West Virginia, or Texas. The smaller distance might be beneficial in reducing technical difficulties of the drilling process. However, the distance would also reduce the distance between the drilling sites and groundwater resources (Durham Environmental Affairs Board 6).

Many residents of Durham County depend on well water as their primary water supply. The Durham County Health Department estimates that there are around 6,000 private wells in the county. As most of these wells are outside the city limits, switching to public water is not an option. Residents that depend on well water are more likely to be negatively affected by the process of fracking (Durham Environmental Affairs Board 11).

Durham does not currently have the water capacity to support fracking operations. Additionally, a long lead time is required for the planning, funding, purchasing, and constructing of additional reservoirs. Disposal is also an issue in Durham, as the exact composition of the wastewater that is generated is typically a trade secret. Because of this fact, Durham waste water treatment plants cannot process the waste water (Durham Environmental Affairs Board 9-10).

Presently, hydraulic fracturing is not approved in North Carolina. However, on February 27, 2013, the North Carolina Senate approved a bill which would allow the North Carolina Mining and Energy Commission to start issuing permits for fracking by March 2015. The bill is currently being debated in the North Carolina House (Drye). In order to study the effects of hydraulic fracturing, a comparison can be made to other areas that have recently permitted fracking. Washington County, Pennsylvania provides a good source for comparison. Shale gas wells have recently been drilled in that area.

Data is gathered using Zillow in conjunction with a Google maps database on oil and gas wells in Pennsylvania. Zillow gives a brief overview of house attributes while gas well positions are highlighted on the map. The distance to gas wells is then estimated by noting the straight line distance between house location and the nearest gas well.

The hedonic model is a widely used approach that values certain characteristics of different products which are not specifically given values in their own markets. Under ideal conditions, the hedonic model can show the marginal values of changing attributes of a product. The hedonic model has been widely used in the housing market when used to study topics ranging from air quality, crime, and school quality. (Pope 499).

Utilizing a hedonic model, it is possible to assess how proximity to a shale gas well affects local residents by looking at the changes in property values over time. A hedonic model can estimate the average “willingness-to-pay” for a particular attribute. The simplest model compares the prices of properties based on their vicinity of a well. This results in the regression:

 

As Zillow only gives the basic attributes of a particular property, the attributes for houses were limited to the number of bedrooms, the number of bathrooms, the square footage of the living area, the lot size, and the age of the property:

 

20 individual properties in in located in Washington County are selected in order to perform the analysis. Taking a robust regression results in the following coefficients (and standard errors) for each term:

Covariate β Robust Standard Error P Value
Well Distance (miles) 0.1136 0.05123 0.045  
Bedrooms 0.0502 0.1617 0.761  
Bathrooms 0.1251 0.0773 0.130  
  0.3177 0.2238 0.179  
  0.1504 0.0785 0.078  
  -0.2435 0.0978 0.027  

 

Looking at the p-values, it can be seen that , , and  are significant at the 10% level. A 1% increase in lot size would lead to about a 0.15% increase in property value. A 1% increase in age would lead to a decrease in value of around 0.24%. For each mile away from an active well, house values rise about 11.4% for each mile.

The problem with the above analysis lies in the fact that there might be a correlation between well distance and the error term. Perhaps gas wells are purposely placed next to run-down houses. Perhaps lease payments for rights would incentivize people to live close to wells.  The key factor for isolating the effects of the shale gas wells is to control for correlated unobservable attributes which may influence and bias the resulting estimators. Using property fixed effects is an easy way to separate the unobserved factors of each property from each other. Looking at the variation in housing prices over time with respect to the change in proximity of a shale gas well allows for the implicit value of that well to be estimated.

Including a dummy variable for each house  allows for factors that do not change over time to be controlled. Due to the difficulty of connecting specific well construction times with the data provided by Zillow, the assumption that no gas well is present before 2004 is made. Changing the variable from well distance to inverse well distance allows for the analysis to proceed. This results in the following regression:

 

Utilizing the 11 remaining data points, the following results are found for the covariates:

Covariate β Robust Standard Error P Value
Change in Inverse Well Distance 0.4367 0.2229 0.079  
  0.5872 0.3474 0.122  

 

Inverse well distance is significant at the 10% level. This regression gives a different result than the last one, showing that housing price actually goes up as the distance to any gas well decreases. This could be due to the fact that these houses might have municipal water rather than well water. However, with data from Zillow, it is currently impossible to know this fact.

A problem with the regression analysis performed is the lack of data points. Cross-referencing Zillow with a map of shale gas well locations is not the most efficient way to collect data. Increasing the sample size by a factor of 10 would increase the accuracy of the results. Ideally, a data set with thousands of samples would be used in this analysis. Zillow also does not provide a detailed report of each house. At times, even the most basic information (lot size) is omitted. Further analysis using more detailed data would provide more conclusive results.

Most of southern Durham County’s inhabitants use municipal water. Fracking and its impact on groundwater might affect these particular residents less than those that depend on well water as their primary water source. Most of the residents of eastern Durham County rely on well water. Zillow currently shows that the price of housing in eastern Durham County is generally much higher than the price of housing in the south. Fracking could impact the property values there greatly.

In the end, the most important aspect to hydraulic fracturing regulation is that relevant monitoring systems are established. If hydraulic fracturing begins in Durham County, the water resources of Durham’s residents need to be protected. A more thorough analysis of the effects of hydraulic fracturing would point to better and safer regulation.

 

Works Cited

Boersma, Tim and Corey Johnson. “The Shale Gas Revolution: U.S. and EU Policy and Research Agendas.” Review of Policy Research 29.4 (2012): 570-576.

Drye, Kelley. Hydraulic Fracturing: State Regulatory Roundup Vol. 15. 8 March 2013. Web. <http://www.lexology.com/library/detail.aspx?g=f0badb74-6409-430f-b8bc-d22839d68b58>.

Durham Environmental Affairs Board. Report to the Joint City/County Planning Council on Some Potential Environmental Impacts of Hydraulic Fracturing in Durham County, and Recommendations to Consider for Future Implementation. Durham, 2012.

Hagström, Earl and Julia Adams. “Hydraulic Fracturing: Identifying and Managing the Risks.” Environmental Claims Journal 24.2 (2012): 93-115.

Hall, Keith B. “Hydraulic Fracturing – a Primer.” The Enterprise 41.11 (2011).

Muehlenbachs, Lucija, Elisheba Spiller and Christopher Timmins. “Shale Gas Development and Property Values: Differences Across Drinking Water Sources.” NBER Working Paper Series (2012): 1-37.

Olson, Jon. Natural Gas Is an Energy Solution That Works Today. 29 November 2011. 17 March 2013. <http://www.usnews.com/debate-club/is-fracking-a-good-idea/natural-gas-is-an-energy-solution-that-works-today>.

Pope, Jaren C. “Buyer information and the hedonic: The impact of a seller disclosure on the implicit price for airport noise.” Journal of Urban Economics 63.2 (2008): 498-516. Web.

Simmons, Daniel. No Evidence of Groundwater Contamination From Fracking. 29 November 2011. 17 March 2013. <http://www.usnews.com/debate-club/is-fracking-a-good-idea/no-evidence-of-groundwater-contamination-from-fracking>.

US Environmental Protection Agency. Basic Information: Emissions from the Oil & Natural Gas Industry. 10 October 2012. 16 March 2013. <http://www.epa.gov/airquality/oilandgas/basic.html>.

—. Study of the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources: Progress Report. Washington, DC, 2012. Web.