Quantifying the Effects of Underground Natural Gas Storage on Nearby Residents

Transcription

1 Quantifying the Effects of Underground Natural Gas Storage on Nearby Residents Michaela Jellicoe Graduate Student Department of Agricultural Economics Purdue University 403 West State Street West Lafayette, IN Michael S. Delgado Assistant Professor Department of Agricultural Economics Purdue University 403 West State Street West Lafayette, IN Selected Presentation prepared for the Northeastern Agricultural & Resource Economics Association s Post-Conference Workshop 2014 NAREA Annual Meeting, Morgantown, WV, June 1-4, 2014 Copyright 2014 by Michaela Jellico and Michael Delgado. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

2 Quantifying the Effects of Underground Natural Gas Storage on Nearby Residents Michaela Jellicoe and Michael S. Delgado Department of Agricultural Economics, Purdue University

3 Introduction Advances in hydraulic fracturing and horizontal drilling have increased natural gas extraction Highly publicized potential hazards of hydraulic fracturing have brought natural gas extraction into the public eye Water use Seismic activity Demand for underground natural gas storage could also increase Unclear how underground natural gas storage activities impact nearby residents

4 Summary Employ hedonic methods to quantify the externalities associated with underground natural gas storage Results indicate that underground natural gas storage and observation well proximity have significant negative nonlinear impacts on housing values In addition increasing the intensity of storage related wells has significant negative impacts Homes with access to public water see smaller impacts due to underground natural gas storage activities

5 Underground Natural Gas Storage After natural gas is extracted it is processed to remove water and other non-hydrocarbons It is then transported by pipeline to consumers Traditionally demand for natural gas has been seasonal Extraction is not seasonal In order to compensate for the differences in timing between supply and demand, underground natural gas storage is used As the industry has evolved the market has expanded uses of natural gas and underground storage

6 Underground Natural Gas Storage Underground formations must have a layer of porous and permeable rock where the gas is stored and a layer of impermeable rock that traps the gas within the formation A formation is chosen based on location and geological characteristics Three types of formations used for underground natural gas storage Depleted natural gas or oil reservoirs Aquifers Salt caverns Each type of formation has differing characteristics that impact the capacity and deliverability of the facility

7 Underground Natural Gas Storage in the Lower- 48 States

8 Underground Natural Gas Storage in Indiana

9 Impacts of Underground Natural Gas Storage Noise and visual Some surface facilities wellhead valve assemblies, gathering lines, compression facilities Compression stations can cause noise impacts Migration leakage of natural gas out of the formation poses risk for groundwater contamination Vertical migration through existing wells Well degradation or failure increases as well ages, including abandoned wells Improperly recycled working gas natural gas can move from high pressure areas to low pressure areas Methane Emissions from off-gassing of the wellhead or emissions from compressor stations Groundwater contamination from natural gas or oil formations

10 Data and Variables 1,512 residential property sales from the Department of Local Government and Finance s Sales Disclosure database 529 of the sales are repeats 2004 to 2013 Cover 16 counties across Indiana determined by creating a 3.2 KM buffer around each underground storage facility Data cleaning All single-family residential properties No $0 or $1 sales, to ensure arms-length sales Housing attributes collected from property record cards available through each county s assessor

11 Underground Storage in Monroe County, IN

12 Descriptive Statistics Variable Mean Std Dev Min Max Sale price ($) Lot size (acres) Height of home (number of stories) Finished living area (sq Ft) Fireplaces Bedrooms Full Bathrooms Half Bathrooms Age of home (years) Age Distance to major road (meters)

13 Descriptive Statistics Variable Mean Std Dev Min Max Excellent grade building quality indicator Good grade building quality indicator Average grade building quality indicator Poor grade building quality indicator Urbanized area indicator Garages Pools Public water indicator

14 Treatment Variable Data Locations and types of underground storage wells comes from two sources Indiana Geological Survey s Petroleum Database Management System Indiana Department of Natural Resources Mapped using ArcGIS Datasets combined for estimating distance from each property to each type of well Proximity treatment variables Petroleum Database Management System data used to estimate count variables Intensity treatment variables Only one dataset used in order to avoid double counting

15 Treatment Variable Summary Statistics Variable Mean Std Dev Min Max Natural gas storage field indicator Distance to nearest natural gas or oil field (km) Distance to nearest natural gas storage well (km) Distance to nearest observation well (km) Storage intensity measure (count of all storage related wells within 3.2 km) Gas storage wells intensity measure (count of all gas storage wells within 3.2 km) Observation wells intensity measure (count of all observation wells within 3.2 km)

16 The Model Log-linear hedonic price function with fixed effects similar to that used by Heintzelman and Tuttle (2012) for estimating impacts of wind turbines lnp ij =α j +βz ij +δx ij +ε ij α j represents the set of county fixed effects z ij are the treatment variables Measure the impact of underground storage proximity or intensity variables Also explore nonlinearities in z x ij are the set of housing attribute variables ε ij is the error term

17 Attribute Results Model n 1512 R County Dummies? Year Dummies? Yes Yes Variable Lot size (acres) Height of home (number of stories) Finished living area (sq Ft) Fireplaces Bedrooms Full Bathrooms Half Bathrooms Age of home (years) Coefficient (Std. Dev.) * (0.0094) (0.0829) ** (0.0001) ** (0.0410) (0.0384) (0.0637) (0.0712) ** (0.0032) Age * ( ) Variable Distance to road (meters) Excellent grade building quality Good grade building quality Average grade building quality Urbanized area indicator Garages Pools Public water indicator Constant Coefficient (Std. Dev.) ( ) ** (0.2568) ** (0.2219) ** (0.2136) (0.1282) ** ( (0.1284) (0.0816) ** (0.3298) Statistical significance at a 5 percent level denoted with two asterisk (**). Statistical significance at a 10 percent level denoted with an asterisk (*).

18 Attribute Results Variable Percent Impact on Sale Price Dollar Impact at Mean Sale Price ($94,559.90) Lot size (acres) 3.84 $3, Finished living area (sq Ft) 0.02 $18.92 Fireplaces 9.96 $9, Age (at mean Age years) $ Variable Percent Impact on Sale Price Excellent grade building quality Good grade building quality Average grade building quality

19 Proximity Results Initial linear proximity treatment variable regressions indicate that the spatial fixed effects capture some differences in home values Linear proximity variables are not significant, and remain insignificant when interacted with water binary variable Find significant nonlinear impacts due to proximity to storage wells with a quadratic model At a distance of one km impact is 9.2% Impact becomes insignificant at mean distance of 2.45 km Find significant nonlinear impacts due to proximity to observation wells with a cubic model At a distance of one kilometer impact is 10.03% Remains significant at distances greater than one km

20 Hedonic Attributes? Proximity Results County Dummies? Year Dummies? Sample Size Yes Yes Yes 1512 Variable (1) (2) Distance to nearest natural gas storage well (km) 0.122** (0.0458) - Distance to nearest natural gas storage well squared ** ( ) - Distance to nearest observation well (km) - Distance to nearest observation well squared - Distance to nearest observation well cubed ** (0.0457) ** ( ) * ( ) R Statistical significance at a 5 percent level denoted with two asterisk (**). Statistical significance at a 10 percent level denoted with an asterisk (*).

21 Intensity Results Results indicate that in general increasing the count of wells within 3.2 km decreases property values An additional storage well of any type decreases property values by 0.43% This translates to a decrease of $ for a home at the mean sale price of $94, An additional underground storage well decreases property values by 0.48% ($453.89) An additional observation well leads to a loss in value of 2.64% ($2,496.38) Homes without access to public water see significant and impacts of larger magnitude than those with access to public water A home without access to public water see a decrease in value of 1.53%, compared to a decrease of 0.32% for a home with public water for an additional natural gas storage well

22 Intensity Results Variable Home with Public Water Percent Impact Home without Public Water Dollar Impact at Mean Sale Price Home with Public Water Home without Public Water Storage Intensity Measure $ $1, Gas Storage Wells Only Intensity Measure $ $1, Observation Wells Intensity Measure $2, $5,787.07

23 Hedonic Attributes? Intensity Results County Dummies? Year Dummies? Sample Size Yes Yes Yes 1512 Variable (1) (2) (3) (4) (5) (6) Storage intensity measure (count of all storage wells within 3.2 km) Gas storage wells intensity measure (count of all gas storage wells within 3.2 km) Observation wells intensity measure (count of all observation wells within 3.2 km) Storage intensity measure X Public water indicator Gas storage wells intensity measure X Public Water Observation wells intensity measure X Public Water * (0.0241) * (0.0281) ** (0.0440) * (0.138) ** (0.0543) ** (0.0418) ** (0.202) ** (0.0543) ** (0.148) R Statistical significance at a 5 percent level denoted with two asterisk (**). Statistical significance at a 10 percent level denoted with an asterisk (*). All results scaled by a factor of 10.

24 Summary of Results Find significant nonlinear effects due to proximity to underground natural gas storage wells Underground natural gas storage modeled with a quadratic functional form Observation wells modeled with a cubic functional form Increasing the number of wells within 3.2 km in general decreases property values These impacts are larger in magnitude for homes without access to public water Observation wells in general seem to have an impact of larger magnitude than other types of storage related wells

25 Robustness Checks Combinations of fixed effects Year dummies only Results similar to the proximity regressions without fixed effects County dummies only Results similar to the proximity regressions with county and year fixed effects combined those reported previously School district dummies only Results similar to the proximity regressions with county dummies, and county and year dummies combined School district dummies and year dummies Results similar to the proximity regressions with county and year dummies Repeat sales parcel level fixed effects Results find that linear proximity variables and water interactions are all insignificant

26 Robustness Checks Socio-economic variables using Census Tract level demographic variables Attribute results negligibly different from results without socio-economic variables Interactions Water interaction prior literature has found that the water source of the home makes a significant difference in the impacts of natural gas extraction on property values Urban interaction prior literature has speculated that rural properties will experience larger impacts due to natural gas extraction Lot size interaction Parsons (1990) argues that locational treatment effects may be biased if not weighted by lot size

27 Implications Results indicate that homeowners do suffer negative externalities due to underground natural gas storage These impacts are more pronounced for homeowners without access to public water Policymakers and industry participants can use this information Improve regulations relating to underground natural gas storage Account for the full costs of underground natural gas storage facilities, especially during development stages Weigh the costs and benefits of developing new facilities Respond to current climate of public awareness and perception of risk within constituents Protect or properly compensate homeowners for the negative impacts of underground storage related activities

28 Conclusions Previous literature has not yet attempted to value the impact of underground natural gas storage facilities on nearby property Given the current climate of increasing attention on the natural gas industry now is a good time to estimate the value of the impact Possibilities for expanded research Apply this analysis to areas receiving more attention due to advances in unconventional natural gas extraction Areas of analysis that have experienced a failure event in an underground natural gas storage facility Use treatment variables that more accurately measure homeowner awareness of risks

29 Thank You for Your Time Questions?

30 Depleted Gas and Oil Reservoirs Most common type of formation used Concentrations of these formations are located in the Midwest and the East coast Development is cheaper than the other two types of formations Known to be capable of storage Previous information on geological conditions Extraction equipment in place, which can be used for storage Requires 50% cushion gas Year long injection-withdrawal cycle Low deliverability used to meet long-term seasonal demand

31 Aquifers Porous rock formation holding water which can be reconditioned for use as a storage facility Concentrations of these formation in the Midwest More expensive than depleted reservoirs Less previously collected geological information Requires infrastructure development Infrastructure is more specialized more pressure required to displace water with natural gas Regulations to protect groundwater sources Larger proportion of cushion gas 50 to 80% Used to meet long-term demand low deliverability, year-long injection-withdrawal cycle Less desirable than depleted reservoirs primarily used when depleted reservoirs are not available near consuming region

32 Salt Caverns Developed from salt domes or bedded salt formations Primarily located in the Gulf Coast region High development costs Requires salt cavern leaching to condition salt formation for use as a storage facility Salt cavern leaching includes brine disposal Highly desirable formation for storage facilities High deliverability allows these facilities to meet peak load situations Smaller capacity unsuitable for meeting long-term seasonal demand Strong walls reduce degradation potential Little allowance for escape of gas once injected Lower cushion gas percentage 20 to 30%

33 Underground Storage in Daviess County, IN