03/28/2012 12:24 pm ET Updated May 28, 2012

The Fracking Plot Thickens: Are Gas Leases on Thin Ice?

I recently wrote about the gas drilling lease issue through the lens of a personal anecdote.

The topic is increasingly in the spotlight as the land grab for gas leases -- by drilling companies seeking to tap shale deposits via high-volume, hydraulic fracturing combined with horizontal drilling (fracking) -- continues through New York State and the nation. The New York Times recently shed light on yet another important aspect of gas drilling leases, that U.S. Department of Agriculture rural housing loans are being routinely granted on properties with oil and gas leases using a so-called "categorical exclusion" from the National Environmental Policy Act (NEPA), although such exclusions are only supposed to apply to properties without environmental risks.

Most people would agree that fracking comes with an assortment of environmental risks given that it's a heavy industrial activity; in this case an activity that introduces hazardous substances into people's backyards. What's less clear is the regulatory and legal landscape. If you have trouble wrapping your brain around this issue, then you're not alone. Fracking is a complex subject with an endless number of sub-themes and gas leases might just be one of the more complicated aspects of this knotty topic.

Elisabeth Radow, an attorney-at-law with a keen interest in environmental impacts on human health and the subject of hydraulic fracturing (and who wrote in depth about gas leases and mortgages in the Nov/Dec 2011 cover story for the New York State Bar Association Journal magazine), helps to explain the significance of the Times story:

The New York Times reported on Monday that environmental specialists at the US Department of Agriculture have recognized USDA mortgage loans made to property owners with oil and gas leases may violate the National Environmental Policy Act (NEPA) if an extensive review is not performed. NEPA is a federal statute enacted in 1969 which requires that all federal agencies' funding or permitting decisions be made with full consideration of the impact to the environment. According to the Times report, USDA mortgages have been routinely granted on properties with gas leases without NEPA review by using a so-called "categorical exclusion" which is supposed to pertain to properties without environmental risks. The Times also reported that recognition in USDA of the need for a higher level of review was anticipated to result in a notice issued in April by USDA Secretary Tom Vilsack clarifying existing rules. However, on the heels of the Times article, Secretary Vilsack stated he will issue an Administrative Notice reaffirming that rural loans are "categorically excluded" under NEPA.

High volume hydraulic fracturing combined with horizontal drilling introduces heavy industrial activity and hazardous substances into property owners' backyards across America where families raise their children and farmers raise cattle and grow crops. In the words of the gas industry (as disclosed in the SEC mandated Form 10-K), this is inherently risky activity, including well blow-outs, explosions, pipe failures, fires, uncontrollable flows of natural gas, oil, brine or well fluids and other environmental hazards and risks which can result in property damage, personal injury and loss of life.

You might be wondering, what does this risk mean for the taxpayer? Radow explains:

Taxpayers subsidize the low interest-rate USDA rural development loans. In addition, these loans are routinely sold into the $6.7 trillion secondary mortgage market; 90% or more of all home mortgages are. To protect the federal government, the lending bank, the mortgage-backed securities investor and the taxpayer, it is critical that people underwriting federally backed loans grasp the multi-step (oil or) natural gas extraction process and assess the risks associated with each step so they can determine if the mortgage collateral (i.e., the land, the house and the water supply) will retain its integrity and value throughout the 30 year loan. Otherwise, USDA (and the other NEPA governed federal agencies involved in mortgage loans) risk litigation.

A close look at the USDA underwriting guidelines reveals that use of a categorical exclusion will not exempt a property from requirements of other environmental laws, regulations or Executive orders. Each property is supposed to be individually reviewed and can lose its categorical exclusion status where "extraordinary circumstances" or "cumulative impacts" are involved; both criteria have relevance here.

Radow predicts we have not heard the end of this debate since the Obama administration appears to be supportive of natural gas extraction, considers America's food supply a matter of national security and is resolute about preventing another mortgage crisis. "To illustrate the conundrum created by these three competing priorities," Radow suggests that we need "a transparent map of all of America's farms and family homes with mortgages, superimposed on a second map of the nation's oil and gas shale plays. That visual would say it all; clearly illustrating just what's at stake."

But here's where it gets really interesting, according to Radow:

USDA underwriting guidelines prohibit a loan on a residential property which produces income or has the potential to produce income, as is the case with a residential property with a gas lease. So, while NEPA's relevance to all federal agencies involved in mortgage loans should be recognized and acted upon-to protect and preserve our food supply, property value and public health-for purposes of USDA residential mortgages, it may be moot.

Many thanks to Elisabeth Radow for her expert aid in unraveling this complex issue. As I wrote last week, in most cases, gas drilling companies shift to landowners the risk of negative environmental and health impacts associated with the fracking technique. With this new information, it would seem that an over-burdened government agency (one that is supposed to be ensuring the safety of our food supply) and taxpayers are shouldering the load.

I encourage you to continue following this unfolding issue and distribute this information to as many people as possible.

(Originally published at Ecocentric)