As Hurricane Sandy battered the East Coast last month, tens of thousands of landowners with oil and gas leases faced an especially acute concern: would they get help from FEMA if their properties were damaged or destroyed by the storm?

The question arises across the Marcellus region –- and the rest of the U.S. – because one of the agency’s disaster response programs will not buyout land that’s been leased to drillers, according to FEMA emails and internal documents.

The US shale boom is drawing increasing attention from federal agencies worried about the potential hazards posed by drilling. A growing awareness of financial risks to landowners and lending institutions associated with oil and gas drilling is slowly emerging. The USDA, Fannie Mae and Freddie Mac have already considered moves to protect themselves from potential legal and financial reverberations.

With FEMA Hazard Mitigation Grant Program funding now at stake, Congress is also getting involved.

“It is my understanding that the problems encountered in these counties are due in part to FEMA guidance indicating that a property is ineligible for acquisition if that property has any mineral leases associated with it,” wrote Pennsylvania’s Senator Robert Casey in a September 26 letter urging the agency to move forward with the grants for properties harmed by Hurricane Irene and Tropical Storm Lee in his home state.

“Homeowners who have suffered due to flooding continue to endure hardship due to these delays,” he added.  “Simply stated, this problem needs to be resolved so that the acquisition process can go forward.”

In September, DeSmog reported that a new national policy issued by FEMA’s Hazard Mitigation Grant Program would block buyouts of leased land in areas prone to catastrophes like floods.

FEMA’s new buyout policy is of national importance. In some parts of the country, drilling in flood plains is by no means a rarity. Landowners in these areas may now not qualify for help in case of a disaster.

In densely populated areas, like Dallas and Fort Worth Texas’ Barnett shale, drillers are more likely to turn to areas that flood often because other areas are off limits due to local regulations. At times, floodplains are the only sites available to drill because the rigs are required to keep a set distance away from homes, parks and other designated areas under zoning rules and other regulations, according to a paper published by the American Society of Civil Engineers.

According to industry estimates, more than 4,300 oil and gas wells have been drilled in floodplains in four of the counties atop Texas’s Barnett shale, where the drilling and fracking boom first emerged.

Part of the larger concern with storms like Sandy has been the open-air impoundments where millions of gallons of toxic wastewater and sludge are stored after it comes up from drilled wells. With high winds or flooding these waste materials have been known to overflow the walls of the impoundments and spill into waterways and onto peoples’ properties. 

In Pennsylvania, environmental officials have said they have not received any reports of such flooding in the wake of Superstorm Sandy. But environmental groups are not so sure.

After last year’s Hurricane Irene, there were reports that oil and gas drilling sites across Pennsylvania flooded, but as residents were focused on cleaning up and rebuilding, few of them took photos or documented the damage to drilling sites.

This time around, the Delaware Riverkeeper is recruiting residents to collect information about any spills or flooding at drilling and fracking sites in their communities. The Riverkeeper is still compiling this information, but initial reports show that in Pennsylvania and West Virginia, atop the Marcellus shale, Hurricane Sandy caused headaches for drillers.

Residential mortgages generally forbid land from being used for industrial activities. But oil and gas leases typically allow this sort of industrial activity on those same properties. As a result, bankers and drillers find themselves with two competing legal documents and the landowner is stuck in between.

FEMA is not alone in noticing the risks associated with the shale drilling frenzy. Realtors, real estate lawyers and the insurance industry have also taken note.

One law firm, Edwards Wildman Palmer LLP, calculated that oil and gas well drillers and operators have been sued at least three dozen times in fracking-related cases, usually over contaminated water or land, and that another two dozen lawsuits have emerged over other drilling related issues. And the number is steadily growing, lawyers from the firm say.

“Now that we’re drilling literally under people’s back yards, the general awareness of fracking as, at least, a potential issue is much higher,” Charles Dewhurst, a partner and leader of the natural resources practice at BDO USA LLP in Houston, told Risk and Insurance magazine last month.

“This shift of the drilling risks from the gas companies to the housing sector, homeowners and taxpayers creates a perfect storm begging for immediate attention,” attorney Elizabeth Radow, wrote in the New York Bar Association Journal last year.

Researchers have confirmed that the effects on property values are real. “We find that proximity to wells increases housing values, though concern about the risk to groundwater fully offsets those gains,” wrote analysts from the National Bureau of Economic Research in a recently released working paper that assessed 19,000 property sales during a five year period in Washington County, PA. “By itself, concern about groundwater contamination reduces property values by up to 24 percent.”

Over the past few years, the list of banks hesitating to write mortgages on properties with gas leases has expanded to include major banks like Citizens Bank and Wells Fargo, according to a banker in New York state who has been researching mortgage questions in coordination with state and local officials. Some banks are charging larger fees for these mortgages, and others are declining to lend altogether, he said.

Drilling does bring economic benefits to those who lease their land and to communities where an oil and gas boom can support many new jobs across a range of sectors. But the point often missed in all the discussion about the jobs created by drilling is that many of these jobs are temporary and the drilling comes with hidden costs to local communities.

For his part, Senator Casey is starting to ask questions about some of these factors.

In his letter, Mr. Casey said he thinks that the buyouts in his state should be allowed to move forward because the mineral leases on the properties in question generally do not allow drillers to use the surface of the land, but only to tap the oil and gas using wells located on other properties. State and local regulations would also bar companies from building any structures on many of the properties, he said.

“Given these unique circumstances, FEMA should work with local officials to move the acquisition process forward,” Mr. Casey said.

Asked repeatedly for comment, officials at FEMA declined to respond.

Image credit: Destroyed house from Hurricane Sandy | Shutterstock