Fracking: Buyer beware

The United States is in the midst of an unprecedented gas-drilling boom. It has been brought on by new technology called hydraulic fracturing or “fracking.” All across the North Eastern U.S. as well as Texas and Colorado, fracking is creating jobs and economic prosperity. Resource booms that require specially-skilled workers often generates a need for housing and an opportunity for investors to get in early and make money. The trouble is there are serious concerns with this type of gas drilling and long wait times between location mapping and drilling. So, is fracking the right investment for you?

What is Fracking?

Fracking is a new type of drilling for natural gas where large volumes of water, sand and chemicals are blasted into a well at high pressure to crack rock and release gas stored deep underground. While the technology and process has been around for more than 60 years, it has only been used extensively in the past decade because horizontal drilling technology now allows companies to access difficult-to-reach gas deposits. Depending on a well site and size, it can be fracked multiple times over the course of years.

According to the International Energy Agency, the global use for natural gas will account for 25% of world energy demand by 2035, which is a 50% rise from 2010 levels. The U.S. government has also said that fracking has the potential to give the country energy independence. This means that fracking will be around for a while.

 Potential Opportunities

Sydney Chase owns a real estate and alternative investment consulting firm with offices in New York and South Carolina. He owns a piece of land in upstate New York that he is currently renting out to a natural gas company—and that’s only the beginning of the potential returns.

“It’s $500 a month for a five-year term,” he says. “Once they start getting gas, I will get a percentage of the royalties from the well.”

So for investors who nab properties where wells are close buy, there is the opportunity to rent out the land to drilling and gas companies who may use it for storing equipment or setting up mobile offices. Depending on the contract that is created, investors can also see a long-term payback in royalties once the well becomes productive and profitable. Considering the expected demand, this could yield a satisfying return that could be used to buy more investment opportunities.

Chase says the other potential opportunity for investors when it comes to fracking is finding properties a few miles away from wells that are being actively fracked. The influx of skilled workers will create a huge demand for short-term apartment rentals, he says.

Considering wells need to be fracked multiple times, the demand for housing will remain steady.

The increased population also creates economic prosperity in the service industries, which in turn can drive up demand for housing and rental properties.

Fracking Concerns

Chase says over 31 states in the U.S. have some type of natural gas drilling or fracking activity. So not only does the potential payoff sound big, but there could be a number of market opportunities to choose from. But before you grab a map and start picking an ideal place, you need to know landing a fracking investment opportunity isn’t all it’s cracked up to be.

“My opportunity was a total fluke,” says Chase. He purchased the piece of land he now rents out to a gas company at an auction a few years ago because it was a cheap buy. One day last year he got a call from the gas company telling him they were going to rent the land. “I didn’t really have many options. I had to sign the lease of what they offered me or go to court to fight it,” he recalls.

In addition the process of identifying where a well is to the actual drilling starting can take years, he says. In his experience in upstate New York, gas companies send in surveyors to do seismic testing and determine where the wells are. These are small teams of workers who stay for very short periods of time. “The community saw a small boom when they arrived, but they left within a year and the economy returned to normal,” he says. Then, the company may decide not to drill the well for a few months or even years. “Right now natural gas prices are lower than they were six months ago. There is a lot of gas on the market,” says Chase. A gas company may choose to delay drilling in order to increase demand and prices for the gas. He says over two years passed before the drilling began near the property he was renting.

“Timing is one big concern,” says Chase. “The problem is gas companies keep everything related to their drilling very quiet.” This makes it hard for investors like you to know where and when to get into a market.

But that’s not the only challenge that the secrecy of the gas companies creates. Companies do not disclose where the wells themselves will be drilled. So an investor who buys a triplex in a town where drilling is expected to begin could end up with a well in their back yard—and that’s bad news for property values.

A Colorado study done in 2001 in La Plata County showed that properties with coal-bed methane gas wells were valued 22% less than similar properties without wells. More recently, says Chase, “property values have plummeted 70% and some people have walked away from their homes.”

The reasons why property values fall so significantly are because of the negative impacts of fracking. The drilling can release toxic gases—including explosive methane—into the air, contaminate water sources and reduce the look of the property.

These side effects are triggering mortgage companies in the U.S. to take a second look at properties near or on wells. It’s becoming increasingly common for buyers to be denied mortgages for homes in areas where fracking is taking place. Insurance companies are also being cautious. Some are no longer insuring homes that have gas wells near by.

Is it a good opportunity?

Steve Martel, a Canadian-based U.S. real estate expert, believes real estate opportunities around fracking are just too risky.

“It’s a little scary and a high risk,” he says. “You’re being a pioneer in a market and that may not pay off.” Martel judges real estate opportunities in the U.S. with a five-point checklist that includes consistent job growth for two years, a diversified economy with at least five Fortune 500 companies and major medical hubs like hospitals, colleges or international airports. While some places where fracking is happening may have those elements, many do not, which Martel says means it is not a risk worth taking.

Chase also wouldn’t recommend people try to find a real estate deal in a community with fracking. “Even with my over 15 years of experience, I would not go after this game,” he says. In fact, he says it’s probably impossible to do. An investor who doesn’t know where a well will be drilled can’t make an informed decision on where to buy. Purchasing a property in the hope that a well opens up soon puts investors at risk of being near the well and having their property value plummet. If the investor waits to see where the well is drilled, then it’s most likely too late, says Chase. “It would be difficult to buy a property then because who would sell besides someone in a distressed situation.”

If you’re very interested in pursuing real estate opportunities in communities where fracking is happening, Chase recommends visiting the place and driving around to see where the well sites are planned. Check out houses about two kilometers away and find out who owns them by checking with local government records. Then contact those people directly to see if they are interested in selling. But it’s a lot of legwork for a risky opportunity. Martel says investors should leave these opportunities for someone else.

“Let other people be risky to see if it’s sustainable for you to invest in.”

Is fracking happening in Canada?

There are at least 175,000 fracking wells in Canada, with the majority of those in Alberta. Although almost every province either has wells or there are exploratory sites set up.

There is major activity planned in British Columbia for the Horn River Formation, which is in north-eastern British Columbia extending to Great Slave Lake in the Northwest Territories. Six areas in BC also hold coal bed methane natural gas potential: Peace country in the north east, Elk Valley in the southeast, Vancouver Island, the south central interior (around Merritt and Princeton), northwestern BC (around Telkwa and Iskut), and the Queen Charlotte Islands.

In Saskatchewan the Bakken Formation or gas field in the southeastern corner of the province is of interest to gas companies.

In Ontario, drilling is expected in the southwest in Lambton and Kent counties, and near Collingwood.

Quebec is home to one of the largest shale formations in North America and many testing sites have already been drilled.

For the East Coast, New Brunswick has over 30 active wells while Nova Scotia already has a number of test wells including at least five east of Windsor. The government of P.E.I. said in April of last year that fracking would not get approval without an environmental assessment and public consultations.

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