At the Intersection of Wall Street and Main: Impacts of Hydraulic Fracturing on Residential Property Interests, Risk Allocation, and Implications for the Secondary Mortgage Market by Elisabeth N. Radow, 77 ALB. L. REV __ (2014). The mere existence of a signed gas lease enables the gas company to leverage it to obtain investors and financing. The mere existence of a signed gas lease can affect the home‘s appraised value and the homeowner‘s ability to obtain a mortgage loan, homeowner‘s insurance, and sell the residence. The cumulative effect of unconventional gas drilling on residences in the thirty to thirty-five states where operations occur, or are planned, poses a potential threat to the nation‘s $6.7 trillion secondary mortgage market, since the secondary mortgage market is supported by an unknown number of mortgages affected by residential fracking. Projections for recovery of shale gas change from year to year with estimates increasing in certain shale plays and decreasing in others. Furthermore, there is data indicating that ―[t]he true extent of unconventional oil and natural gas reserves in the United States is uncertain . . . because assessments of technically recoverable reserves are far more predictive than they are factual.‖ …
Shale gas investors, including New York State‘s pension fund, hope to cash in on the shale gas boom. Unconventional gas drilling requires access to substantial cash flow. During the past several years Wall Street private equity investment firms, such as KKR, have raised billions of dollars from investors who seek high returns and must accept the risk and volatility that goes along with it. …
But there are already cases where the methane gas has made it up into the aquifers and atmosphere. Sometimes through old well bores, sometimes through natural fissures in the rock. What we don‘t know is just how much gas is going to come up over time. It‘s a point most people haven‘t gotten. It‘s not just what‘s happening today. We‘re opening up channels for the gas to creep up to the surface and into the atmosphere. And methane is a much more potent greenhouse gas in the short term—less than 100 years—than carbon dioxide.
And with respect to reliability and resilience of the infrastructure: What you [also] don‘t know [is that] when you plug that well, how much is going to find its way to the surface without going up the well bore. And there are lots of good indications that plugging the well doesn‘t really work long-term.
A. Attributes of Home Ownership
“A home represents a family‘s most valuable asset”: financially, spiritually, and Otherwise. The property‘s value is derived from a bundle of rights: the right to construct, obtain a mortgage loan, lease and sell the property, the expectation of clean running water, electricity, a “roof over one‘s head,” “peaceful sanctuary,” and a safe place to raise children and grow our food. We Americans pay for these rights when we purchase our homes. We expect these rights to continue until we sell our homes. Homeowners on Main Street across the United States expect the property value to increase over time, or at least not to diminish. So does the mortgage market—Wall Street‘s investors depend upon it. So does local and state government; our tax base depends upon it.
B. The Gas Lease
Up to now, home has represented one place people have control. Gas leases take away homeowner control in several ways. … Gas leases are often silent on allocation of risk and liability. To the extent the gas lease delegates rights of property use to the gas company, this corresponds to a diminution of the homeowner‘s use and enjoyment of those attributes of the residence and by extension, its market value.
C. The Risks
The gas companies‘ 10-Ks, filed with the Securities and Exchange Commission (―SEC‖), characterize unconventional gas drilling as subject to many risks. … If any of these hazards occur, they can result in substantial losses as a result of: injury or loss of life, severe damage or destruction of property, equipment and natural resources, including water. Contaminated water affects property use and property value. … New York has an estimated forty-eight thousand unplugged and abandoned oil and gas wells, some of which may provide an unwelcome pathway for future well-water contamination should New York proceed with unconventional gas drilling. A home without potable water won‘t sell. A farm without potable water will fail. While water contamination from gas drilling operations is the most discussed adverse impact to a residence‘s use and value, structural damage to the residence represents another cause for concern. … Any of these invasive gas-drilling operations can cause a home‘s foundation to falter and walls to crack, making the residence unsafe to inhabit.
D. Financing and Assigning Gas Leases
Gas leases give the gas company the right to pledge as collateral or sell and assign the gas lease (or interests in the gas lease) without homeowner consent. This uncharacteristic right of a lessee saves the gas industry the time consuming step of involving the homeowner in its operations. It also deprives the homeowner of any control over the family‘s most valuable asset since there is no homeowner opportunity to determine who ultimately controls the lessee‘s position under the gas lease, which contractors can enter their private property, or the quality and safety of the work they perform. The practice of leveraging an interest (i.e., the right to extract shale oil or gas) in real property to finance drilling operations has been applied liberally to the development of the shale gas revolution sweeping the country. What distinguishes this borrowing practice from the more typical leveraged real estate financing is that the gas companies often don‘t own the land: they lease it.