Oil and gas exploration could shock housing markets

The special report from Reuters hit the wire on Wednesday Oct 9, 2013 at 6:14am in New York. Authors Michelle Conlin and Brian Grow engineered the wording just so, as to maximize impact. The title of the piece read "U.S. builders hoard mineral rights under new homes."

In the piece, homeowners declared their shock that such a thing could be happening, literally right under their feet. D.R. Horton was named and shamed a “heavy user” of the practice. 

The climatic scene from “There will be blood” comes to mind. In that story, miner-turned-oilman, Daniel Plainview, buys all of the property around the Sunday ranch and uses drainage to sieve away their vast, lucrative stores underneath. 

“I drink your milkshake!” Plainview declares before beating the Sunday heir to death with a bowling pin. Gruesome. 

The truth, as always in the housing business, is much more nuanced. This is no miscarriage of justice. D.R. Horton is not conning anyone out of his or her mineral rights. And neither is it alone. An article in the fall 2012 issue of the Appraisal Journal states, “It is common for owners when selling their land to reserve all or part of the minerals for themselves — thus, selling the surface only or the surface and part of the mineral interest.” 

Those words, written by Dr. Joseph Lipscomb, a professor of finance and real estate in the Neeley School of Business at Texas Christian University, in Fort Worth, indicate a widespread practice that needs proper evaluation. 

The demonization of mineral rights conveyance won’t change the growing impact the oil and gas industries are having on the real estate market. 

“When advances in drilling and fracturing technology made shale gas production feasible, mineral estates once believed to have little or no value became potentially very valuable and appraising this land became more complex than a routine appraisal of the fee simple estate,” Lipscomb wrote. 

The mortgage industry may be more aware of this than the oil and gas industries, it should be noted. Wingspan Portfolio Advisors, when working with a large energy company, found that more than 10% of the residential oil and gas leases involving residential communities are endangered by foreclosures and mortgage defaults. 

These properties are located in important petroleum producing areas across the country. The Barnett Shale, for example, is located underneath where most North Texans sleep at night. And energy companies want it. 

The other Lipscomb

The aforementioned Joe Lipscomb has a cousin who also studies the impact of energy production on the housing market, but in a different way. His name is Cliff and he serves as the economic research director at Greenfield Advisors. Cliff’s main beef relates to fracking and property values as the evidence is mixed and in its infancy. 

As of now, the research is mixed. Cliff claims recent research proves that a 2011 Oklahoma earthquake is directly correlated to fracking activities. It’s a concern. 

The domestic energy business is on a tear. 

“Horizontal drilling and hydraulic fracturing in shale and other tight rock formations continued to increase oil and natural gas reserves,” said U.S. Energy Information Administration spokesman Adam Sieminski. “Higher oil prices helped drive record increases in crude oil reserves, while natural gas reserves grew strongly despite slightly lower natural gas prices in 2011.” 

Proved oil reserves, including both crude oil and lease condensate, increased by 15% in 2011 to 29 billion barrels, marking the third consecutive annual increase and the highest volume of proved reserves since 1985. And Texas recorded the largest volumetric increase in proved oil reserves among individual states, largely because of continuing development in the Permian and Western Gulf basins, while North Dakota had the second largest increase, driven by development activity in the Bakken formation in the Williston Basin. 

Natural gas proved reserves, estimated as wet gas that includes natural gas liquids, increased by almost 10% in 2010 to 348.8 trillion cubic feet, marking 13 years of annual increases. 

Pennsylvania’s proved natural gas reserves, which more than doubled in 2010, rose an additional 90% in 2011, contributing 41% of the overall U.S. increase. 

November 2013 F2 1

Considering that proved reserves are those volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years, this is the number energy companies salivate when reading. They want access to their business of tomorrow, and are working toward this goal accordingly.

Local municipalities in the Dallas/Fort Worth area are quietly exploring the lease of public parks and playgrounds to give energy companies access to Barnett Shale inpoints. The move is bound to be met with extreme homeowner resistance; the use of induced hydraulic fracturing takes away from water otherwise set aside for human consumption. The release of gas into the air is also another concern. And with the jury out on whether or not having an energy company set up shop next to your kid’s swing set is good for home prices, Americans will have a predictable reaction: not in my backyard.

And for that same company to then take from underneath the property and not give back in a meaningful way, as energy companies are often accused of doing, then the potential for a housing versus energy battle is not out of the picture.

Thankfully, no one is reaching for their bowling pins just yet.

There are solutions out there, according to Cliff Lipscomb. Related to mineral rights, a property owner would have to look through his/her deed to see if the mineral (also called the subsurface) rights were included in the transaction. 

“I have heard stories where property owners were relinquishing their mineral rights without their knowledge,” he told HousingWire. “In some of those cases, I think it is a case of property owners not reading the “fine print” in contracts. In other cases, mineral rights were separated from the surface rights long ago.”

Cliff adds that where he works in Atlanta, Ga., there is no statewide central clearinghouse for deeds showing who owns the mineral rights. 

“I understand from a local real estate attorney that the typical title searches done for a property buyer does not go back far enough to uncover situations where mineral and surface rights were separated,” he added.

Spreading Wings

When Wingspan’s oil and gas industry specialists discovered hundreds of leaseholds that were wiped out due to foreclosure on the mortgage, they saw an opportunity. According to President Steven Horne, oil and gas companies need more knowledge in dealing with the mortgage servicers handling foreclosed properties. 

Horne says it was shocking that the analysts found a high level of exposure when looking at a relatively small sample size of 5,000 properties. And the problem will continue to grow as natural resource production becomes more domesticated.

“We believe that up to 25% of the oil, gas and mineral leasehold properties out there may be in danger of losing their leases due to causes that are preventable with the right intervention with mortgage servicers,” he said back when the issue first arose. “We’re in an environment where there is much at stake, both economically and politically, in the success of the oil and gas industry at making us less dependent on foreign energy,” he said.

Specialty servicers are notorious for breaking off into tailored businesses elsewhere. Some do escrow, others title, some move into servicing RMBS. Wingspan, months later, appears to have hit on a viable source of revenue with its natural resources dealings, such is the demand.

“The oil and gas industry continues to have risk to their drilling operation with properties going through the foreclosure process without the proper lease subordination,” said Catherine Castle, Enterprise Analytics EVP of Wingspan in an update provided to HousingWire. 

“The lease preservation specialists at Wingspan continue to be successful in obtaining leases for those properties that have completed foreclosure process,” Castle said. “A new process of contacting the current owner or new owner whether that is a bank, investor or other institution has provided the needed lift to the success of lease preservation.” 

Becoming less dependent on foreign energy is a positive, as is preserving the rights of one business, but not at the expense of another. The energy industry brings with it jobs, higher wages, hope and the belief in the strength of blue-collar jobs. Development in more suburban or urban areas means the local market can be tapped to work and families need not be uprooted from elsewhere; there is stability in that, granted. 

All of this can push up the price of a home.

But it also brings industry, with cargo trucks honk-greeting early morning arrivals and the potential for gas seepage into the drinking water polluting an even more valuable resource. There are also more esoteric impacts, such as a change of odor in the air and, possibly, more earthquakes. 

All of this can bring down property prices.

Cliff goes further in his white paper. “In addition to physical impacts from direct development, shale gas development leads to new legal and regulatory challenges for real estate valuation,” he writes. “How local, state, and federal governments choose to regulate shale gas development will impact real estate values. These impacts are not trivial to individuals and families for whom real estate is a large value asset.“

In the race to cut as much power out of the earth as possible, both industries need to be careful not to fracture the delicate economic balance sitting right on top. 

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