CONDUCTING DUE DILIGENCE IN WATER RIGHTS AND WATER SUPPLY TRANSACTIONS FOR OIL AND GAS OPERATIONS
| Jurisdiction | United States |
(Apr 2016)
CONDUCTING DUE DILIGENCE IN WATER RIGHTS AND WATER SUPPLY TRANSACTIONS FOR OIL AND GAS OPERATIONS
Christopher R. Stork
Partner
Patrick-Miller-Noto
Aspen, CO
www.waterlaw.com
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KEVIN L. PATRICK is a Shareholder and senior attorney with the firm Patrick Miller Noto with offices in Aspen, Denver, Scottsdale, and Tulsa. The firm confines its practice to select areas of expertise dealing with water rights, water transfers, water and waste water planning and development, basin mediation, and tribal water law. For more information, please visit the firm's website found at www.waterlaw.com. He has a J.D. from the University of Tulsa School of Law, National Energy Law & Policy Institute, and a B.A. from Virginia Tech. He is licensed in AZ, CO, OK, and TX, as well as a number of US District Courts, 10th Circuit Court of Appeals, and the U.S Supreme Court. He has been lead counsel on over 40 appellate cases before State Supreme Courts, U.S. Circuit Courts, and the U.S. Supreme Court on water issues. He is on the Board of Visitors of the Sustainable Energy Resources Law Institute of the University of Tulsa and the Board of Advisors, Bloomberg Water Law & Policy Monitor. He is a frequent speaker and writer at conferences throughout the United States, Europe, and South America on transboundary water issues and the interplay between water supplies and the energy sector. For a listing of his publications see: www.waterlaw.com/our-people/kevin-i-patrick/. He was a contributing author of Beyond the Tracking Wars published by the ABA and is also the author of two critically acclaimed novels in the thriller/suspense genre: Threatened Waters, published in December 2014 and Unholy Alliances, published in November 2015, both by River Walk Publishers.
1. Introduction: Local Jurisdiction Water Laws
Water is the world's most precious resource. An entire regime of law is devoted to its preservation, conservation, and allocation. This complicated system of law is increasingly relevant to oil and gas operations. Because of its importance, water may be thought of as the fuel for many of these endeavors. Consequently, operators must ensure that the water used for and produced from those operations complies with the applicable laws and regulations of the state in which a site is located. With a basic understanding of the frame work of water law, operators can make informed decisions regarding the operation, the water use, and production of water. A watchful eye towards water concerns during the due diligence process is necessary to ensure that water issues are not impediments to oil and gas operations.
Generally, oil and gas operations use a minimal amount of water as compared to other water uses. For example, the Colorado Oil and Gas Association, a division of the Colorado Department of Natural Resources, published a set of "Water Use Fast Facts" regarding the Colorado oil and gas industry's water use. That study found that water use was limited to 0.13% of Colorado's total water consumption.1 Despite this minute amount in comparison to other uses as a whole, acquiring dependable and legal supplies of water is still essential to all oil and gas operations. The water supply must comply with the applicable state laws and certain federal laws, particularly in the disposal arena. Importantly, the water must be in priority and used for purposes that are consistent with the particular State's water decree, entitlement, or permit. To ensure compliance, a brief overview of the systems of water law and their respective principles will help operators make informed decisions regarding permitting and compliance.
Throughout the United States, the laws surrounding the allocation of water are broken down into two basic systems: the riparian doctrine and prior appropriation doctrine (with a third hybrid system that borrows principles from both).2 Each system has a unique history and the adoption of each depended greatly upon the varying geography of the United States and varying interests and demands for water in the areas. For the perspective of an oil and gas operator for
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due diligence purposes, a basic understanding of each is important as the intricacies of each can play a major role in making informed decisions.
A. Riparian Doctrine
The majority of the states along and east of the Mississippi River follow the riparian doctrine.3 This doctrine, adopted from England, suited the humid environment of these states.4 The early rationale behind the riparian doctrine was that landowners whose property abutted a water course were allowed to make use of that water. Essentially, water use was tied to land ownership.5 A riparian owner was entitled to make reasonable use of the water so long as the owner did not diminish the equal right of other riparians to use the water.6 Presently, however, most riparian states now have permit statutes.7 Accordingly, common law riparianism has been replaced with what is known as "regulated riparianism."8 The difference being that under regulated riparianism no water way be taken without a permit issued by an applicable administrative agency in the state.9 Thus, simply owning riparian land does not mean a person has a right to divert water from the abutting watercourse in most cases. In the oil and gas context, courts in riparian states have determined that using water for mineral operations or processing is a reasonable use.10
B. Prior Appropriation
The other major system of water law is known as the prior appropriation doctrine and will be the primary focus of the due diligence discussion in this paper. This doctrine encompasses most of the western United States.11 This doctrine can be summed up by the idiom
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"first in time, first in right."12 Under this doctrine, the person who first accessed and transported water to where it could be beneficially used gained a paramount right to continue using the water. Thus, the concept of "staking a claim" to minerals was carried over to the water context. This person is known as a senior user, and they enjoy protections from later users.13 Priority or seniority of a water right is generally established by the date upon which water was put to beneficial use, or through manifestation of intent and an overt act to place water to beneficial use.14 Unlike the riparian doctrine, prior appropriation does not pair land ownership and an abutting water source with the right to make use of that water.15 In fact, this doctrine has long recognized the need to take water from its source for use elsewhere throughout the West due to the environment.16 To secure a valid appropriation, certain steps must be taken. The traditional elements to establish a water right are: (1) intent to apply water to a beneficial use; (2) an actual diversion of water from a natural source; and (3) application of the water to a beneficial use within a reasonable time.17 A beneficial use that will support a valid appropriation must have a specific intended purpose such as irrigation, fire protection, mining, or domestic use.18 However, this term is subject to judicial determination and has been limited in some cases.19
Despite the adherence to the prior appropriation doctrine, each of the western states is unique in its needs. Thus, this has resulted in large and complex bodies of statues, regulations and enforcement agencies, along with local customs designed to meet the needs and goals of
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each state. These differences can most aptly be seen in Colorado. Of all of the prior appropriation states, only Colorado utilizes a water court system to judicially allocate water and determine water issues such as injury as between water users. Under the 1969 Water Rights Determination and Administration Act, Colorado is divided into seven water divisions each (corresponding to the state's major river systems) with a division engineer and a court for each.20 Seventeen of the other western states have permit systems.21 The systems function similarly with each requiring an applicant to file an application for a water right which is then followed by a fact-finding process and, if proper, an adjudication.22 Under, a permit system, however, a state agency and not a judicial court conducts this process.
Courts in prior appropriation states have found that using water for oil and gas operations is a beneficial use.23 In fact, the prior appropriation doctrine came about from the need to transport water to gold miners24 and many of the earliest water law cases in prior appropriation states involved mining issues.25 Mineral exploration was a substantial contributing factor, along with the reality of the Western environment, for the rejection of the riparian doctrine.26 More specifically, in Colorado the Supreme Court has ruled that water produced in conjunction with the oil and gas drilling process is a beneficial use and must be permitted.27 There, the Court found that the Coal Bed Methane process uses water by removing it from the ground in order to accomplish a benefit - extracting gas. The State Engineer thus must permit wells that extract groundwater in the form of produced water.28 Thus, oil and gas operations within Colorado must be permitted. Likewise, Oklahoma has recognized water used in oil and gas operations as a
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beneficial use of the state's water sources.29 As such, a permit must be acquired from the Oklahoma Water Resources Board.30
C. Hybrid States
Lastly, some states have combined elements of the riparian and prior appropriation doctrines into what is known as a hybrid system.31 These states have generally recognized existing riparian rights but limited their expansion and recognize new rights only by prior appropriation.32 These riparian rights must generally be timely filed to be recognized.33 Generally, statutes within...
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