When oil & gas & water share a well

Oil and gas producers in Colorado have received a crash course in water rights law over the last several years, part of a rapid evolution in the regulatory landscape that has led to significant changes to the way water is managed by the industry. 

In addition to hydrocarbons, oil and natural gas wells often produce water as a naturally-occurring byproduct of the mineral extraction process.  This “produced water” varies widely in quality and quantity, but is often brackish, highly saline water brought up from geologic formations deep within the earth.  It is water, however, and water rights have long been a source of conflict in the arid states of the Rocky Mountains, where it is often said that “whiskey is for drinking and water is for fighting.”  In Colorado, all ground water is legally presumed to be “tributary,” or hydrologically connected to surface streams.  This presumed connection has resulted in a series of legal battles over the potential impacts of produced water withdrawals on surface water supplies.

Like most Western states, Colorado water law is based the doctrine of prior appropriation, or “first in time, first in right.”  A person who diverts water from a stream or a well and applies it to a non-wasteful beneficial use can obtain a water right with a priority date.  In times of shortage, the older, or more “senior” water rights may require junior rights to curtail their water use until the seniors are satisfied.  Most of Colorado’s major river basins are over-appropriated, meaning that water is almost always in short supply, and it is not uncommon for only water rights dating to the 1800s to be entitled to divert water.

The debate over produced water really came to the surface (pun intended) in 2009, when the Colorado Supreme Court ruled in Vance v. Wolfe that the State Engineer has a non-discretionary duty to administer tributary produced water from coal bed methane (“CBM”) natural gas wells according to the priority system.  Historically, the State Engineer had taken the position that produced water was strictly a waste product that was under the exclusive jurisdiction of the Colorado Oil and Gas Conservation Commission. 

In the Vance case, however, the Court ruled that mere withdrawal of produced water to facilitate CBM production was itself a beneficial use of water giving rise to an appropriative water right and the requirement of regulation under Colorado water law.  As a result, CBM wells in Colorado are now required to have water well permits.  Additionally, all oil and gas wells that withdraw tributary produced water in over-appropriated basins must obtain Water Court-approved augmentation plans, or Substitute Water Supply Plans approved by the State Engineer, in order to replace out-of-priority depletions and prevent injury to senior water rights.  This aggressive regulation of produced water withdrawals is unprecedented in the states of the Rocky Mountain West. 

In response to the Vance case, the Colorado Legislature passed House Bill 09-1303, which was signed into law by Governor Owens in 2009.  Under this law, and subsequent amendments, the State Engineer is authorized to conduct rulemaking and adjudicatory hearings to determine areas and formations of the state where produced water is “nontributary” (having little or no connection to surface streams) and therefore does not have to be administered within the priority system. 

A large-scale rulemaking proceeding was conducted in late 2009 and early 2010, where proponents of such nontributary determinations presented extensive technical evidence regarding the hydrogeology of numerous oil and gas producing formations and the relative depletive effects of produced water withdrawals on surface streams.  Similar, smaller-scale proceedings continue to be filed and prosecuted relating to geographic areas not addressed in the initial rulemaking. 

In a sense, the state’s regulation of produced water withdrawals is the “flip side” of the current debate over hydraulic fracturing.  In hydraulic fracturing, pressurized water is injected into an oil gas well in order to fracture, or force open cracks in the target formation which then allows oil and gas to be produced in greater quantities. Critics of hydraulic fracturing assert that the fluid used in the process, which is typically made up mostly of water and sand but can also contain added chemical compounds, may migrate into potable ground water aquifers.  Critics also question the relatively large volumes of water that can be required for this process, and eyebrows have been raised by the sale or lease of municipal and agricultural water supplies for oil and gas production, even as the state struggles under drought conditions.

In a potentially elegant solution, many oil and gas producers are now treating, recycling, and reusing produced water for subsequent drilling and hydraulic fracturing operations.  In 2010, the Colorado Legislature passed Senate Bill 10-165, which provides that nontributary produced water may legally be used for such oil field purposes without triggering the need for a water well permit.  Entrepreneurial companies have also entered this market by providing “cradle to grave” water supply, management, and disposal for hydraulic fracturing fluid and produced water.  Oil and gas companies operating in Colorado should be vigilant and proactive to ensure compliance with the complex and unique requirements of state water rights laws.