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Analysis: U.S. drilling boom leaves some homeowners in a big hole

Homeowner Gary Gless looks at cracks in cement in his backyard in Los Angeles, California December 11, 2013. REUTERS/Mario Anzuoni
Homeowner Gary Gless looks at cracks in cement in his backyard in Los Angeles, California December 11, 2013. REUTERS/Mario Anzuoni

By Michelle Conlin

(Reuters) - When Gary Gless bought his sleek, modernist house in Los Angeles in 2002, he thought he had hit a "gold mine." The world's largest inner-city park - featuring a lush, 18-hole golf course - was about to get built across the street. Gless's balcony was set to overlook the clubhouse and first tee.

Today, instead of golf carts and fairways, Gless looks out on to drilling wells and oil pads. The park plan was ditched, and Freeport-McMoRan Oil & Gas LLC now operates 700 wells there - and 400 more are on the way. All the drilling, Gless says, has caused house foundations to crack and swimming pools to start to slide down hills.

Gless, who holds the mineral rights to his land but collects no royalties, would move if he could. But he is stuck.

"Who would want to live here?" says Gless, who says his house has lost at least 80 percent of its value. "I wouldn't even buy my own home."

Freeport-McMoRan, part of Freeport-McMoRan Copper & Gold Inc, said that, for the past three years, its surveys of the oilfield and surrounding communities have found no connection between its activities and "localized claims of property damage." It said it would continue to evaluate the issue.

The United States has a long history of keeping industrial activity out of middle and upper-middle-class residential neighborhoods. But that is starting to change with the spread of new technology for oil and gas drilling, such as horizontal drilling and hydraulic fracturing, or "fracking."

The new techniques have allowed once-unreachable reservoirs of energy, trapped beneath the forested suburbs and bustling urban centers of places like Los Angeles, Denver and Cleveland, to be pumped out for the first time. As a result, millions of American homeowners now find themselves living within a mile of drilling activity that they say is deflating the value of their homes, making it hard for them to move.

It is one of the hidden costs of the oil boom, which has created thousands of jobs, spurred local economies and lowered domestic energy costs.

"You go to buy a home, you see that it has a well pad in the backyard, and essentially you might say I'm not willing to pay very much for this house," said Elisheba Spiller, an economist at the Environmental Defense Fund. "That's where the drop in value comes in."

Spiller - along with Christopher Timmins, a Duke University economics professor, and Lucija Muehlenbachs, a fellow at think tank Resources for the Future - published a working paper on Monday that found shale gas drilling within a kilometer (0.6 mile) of a home can decrease property values by an average of 16.7 percent if the house depends on wells - and not municipal sources - for its drinking water.

Gless, the Los Angeles homeowner, gets municipal water during the dry months of summer, but in winter he relies on well water.

The study, which analyzed home values in 43 counties in New York and Pennsylvania, was inconclusive about the impact on properties within a kilometer of shale gas wells if houses had water piped in from town.

Timmins said his additional research in Texas shows similar results, suggesting the perceived risk of water contamination, based on the proximity of wells, can drag down home values.

Brian Straessle, a spokesman for the American Petroleum Institute, an oil and gas industry trade group, declined to comment directly on the findings of the study.

He said that, thanks to the U.S. energy boom, American homeowners' energy bills have been cut by an average $1,000 a year and that the industry has led to massive job growth in areas of the country with high joblessness.

"Oil and natural gas has been a big, bright spot in our economy for quite some time now," Straessle said. "You need to think of all the folks who, because this industry is creating these jobs, have neighbors who are back to work and who have homes that are not foreclosed on."

"UNSELLABLE"

There are no databases that keep track of how many homeowners are affected by the U.S. oil and gas drilling boom.

Real estate brokers say they see more signs of prospective home buyers worrying about the health and environmental effects of living close to a well.

"For the most part, it renders those houses unsellable," said Phyllis Wolper, a Denton, Texas, realtor who has several clients who live near oil and gas wells and have been unable to sell their homes.

A University of Denver study found that a majority of 550 people surveyed would decline to buy a home near natural gas drilling. The study, to be published in the Journal of Real Estate Literature, also found up to a 25 percent reduction in bid value for homes located near these "fracking scenarios."

"There's a stigma," said Ron Throupe, one of the study's authors and a professor at University of Denver's Daniels College of Business.

Little protection is available to homeowners. Insurance policies exclude anything having to do with "industrial operations" and title companies exclude fracking activity from their policies, too.

Instead, homeowners in such states as Ohio and Arkansas have sued energy companies, with the allegations ranging from groundwater contamination to loss of their land's market value. Since 2009, landowners in eight states have filed more than 35 suits, according to a report by law firm Fulbright & Jaworski. The landowners either leased land to drillers or lived in "close proximity" to the fracking.

SOME HAVE BENEFITED

To be sure, many homeowners have benefited from the oil boom. A typical drilling lease can generate bonuses for its owner worth thousands of dollars per acre and a share of production profits as high as 25 percent. In 2012 alone, oil and gas operators paid more than $20 billion in gas royalties, according to the National Association of Royalty Owners.

But for those who own land near drilling sites and don't receive royalties, most of them end up with less than nothing.

Susan Fowler, an automotive design engineer, owned a roomy, brick Georgian in a top Cleveland school district. Her sun-scrubbed kitchen overlooked a grove of evergreens. But in 2009 she had to flee her home after her neighbor leased his mineral rights and a fracking well popped up next to her backyard.

Fowler, who got her water from Cleveland, says the fumes, glaring lights and deafening noise from the trucks and pump jacks made it impossible for her family to stay. They eventually moved to Portland, Oregon.

"My beautiful house was all of a sudden on an industrial site," Fowler says. "We wanted to get as far away from fracking as we could."

Last year, their house sold for $225,000 - about half its appraised value.

(Reporting by Michelle Conlin in New York; Editing by Frank McGurty)

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