WATER SCHEMES ACROSS THE SHALE PLAYS: COLORADO WATER SUPPLY AND DISPOSAL OPTIONS FOR NIOBRARA FORMATION OPERATIONS

• Jurisdiction: United States

Development Issues in Major Shale Plays
(May 2014)
CHAPTER 6D
WATER SCHEMES ACROSS THE SHALE PLAYS: COLORADO WATER SUPPLY AND DISPOSAL OPTIONS FOR NIOBRARA FORMATION OPERATIONS
Zach C. Miller
Partner
Davis Graham & Stubbs LLP
Denver, Colorado

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ZACH C. MILLER has practiced environmental, water, and natural resources law since 1980. He has broad experience before numerous state and federal agencies in disputes over, and permitting for, oil and gas operations, public land uses, National Environmental Policy Act (NEPA) compliance, water rights, water quality, air quality, hazardous substances, wetlands, pesticides, mining, mineral processing, ski areas, power projects, and related issues. He has litigated a number of complex cases in state and federal courts relating to these and other natural resource-related matters. Building on his government experience, Mr. Miller has dealt with various resource-related matters on Indian lands and with several tribal entities. He has handled numerous judicial and administrative enforcement and civil penalty actions relating to these areas. Mr. Miller's practice also includes title review and complex transactional work for water rights, mineral interests, and other real property, with an emphasis on brownfield projects and environmental audits and related transactions for mineral properties and processing facilities. He has represented clients in several of the largest water rights acquisitions and change cases in Colorado history. He has also represented developers and lenders in connection with permitting and other regulatory matters for major electric generation and wind energy projects. He has served as an expert witness in state and federal courts on wetlands regulation and Colorado water rights matters. Mr. Miller has also acted as special counsel to the cities of Boulder, Loveland, Aurora, and Greeley in various water and environmental matters and is a former member and chair of the Environmental Advisory Board for the City of Boulder. Prior to joining Davis Graham & Stubbs LLP in 1981, Mr. Miller served as special counsel to the Assistant Secretary for Indian Affairs and as an attorney in the Honors Program of the Solicitor, U.S. Department of the Interior, in Washington, D.C. Mr. Miller is listed in the Guide to the World's Leading Environmental Lawyers. He is named a "Leader in Their Field" in Chambers USA for Natural Resources and Environment and in The Best Lawyers in America in the fields of Water Law, Environmental Law, and Environmental Litigation. In 2013, Best Lawyers in America named him Lawyer of the Year in Colorado for Environmental Law. Mr. Miller also has an AV Preeminent Peer Review Rating from Martindale-Hubbell. In 2011, he was inducted as a fellow in the American College of Environmental Lawyers. He received his JD in 1980 from the University of Colorado, and his BA, cum laude, from Colorado College in 1975.

I. Introduction and Overview

This paper summarizes Colorado law and regulations applicable to acquiring, using and disposing of water in connection with oil and gas exploration and production ("E&P") operations in the Niobrara formation in northeast Colorado.

With respect to the acquisition and use of water for fracking and other E&P-related purposes, there are five (5) different types of water and associated water rights in northeast Colorado, which each has its own unique legal criteria and requirements: (1) tributary surface water, (2) tributary ground water, (3) nontributary ground water, (4) designated basin ground water, and (5) Denver Basin ground water. It is critical for Niobrara operators exploring potential sources of water for E&P operations first to determine what type of water is being offered or considered, and then to carefully comply with the requirements, restrictions, and procedures applicable to that particular type of water.

Surface waters are administered under the Prior Appropriation Doctrine priority system, where "senior" water rights have a first-priority right to available water in times or shortage and are judicially administered. Because all surface water in this part of the state is already spoken for many times over, the right to use surface water for a new use can only be obtained either by changing an existing senior right or by purchasing water from a city or other water right holder whose rights are already usable for industrial use. A change of existing water rights is a complex process overseen by a designated water court, which can take two to five years or more, depending on the complexity of the change and the extent of the opposition. An administrative, annually-renewable Substitute Water Supply Plan issued by the State Engineer can authorize the changed use while the water court process is pending, but this is still generally a costly and complicated alternative.

Ground water law in this part of Colorado is particularly unique and complex. As explained below, both the geologic formation from which ground water is withdrawn and its relative geographic location of withdrawal are relevant to how the withdrawn ground water is allocated and regulated in Colorado. As discussed below, nearly all of the Niobrara formation in Colorado falls within the nontributary area of the Denver-Julesberg (or "D-J") Basin, as defined in the State Engineer's rules described below. As a result, produced water withdrawn from most of the Niobrara formation is deemed "nontributary" by rule, so the operator will generally not need to obtain a water well permit or obtain a Water Court-approved augmentation plan for those Niobrara wells either to pump produced water or to reuse that water for E&P-related purposes. However, Niobrara wells that do not fall within the nontributary area delineated by the existing SEO Rules will need to submit a petition to the State Engineer to establish that the produced water withdrawn from that portion of the Niobrara formation is nontributary.

A portion of the Niobrara formation in Colorado also overlies several basins containing designated ground water aquifers known as "designated basins". The water in these designated

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basins is subject to separate and usually more strict regulation than other types of ground water, partly based on ownership of the overlying land. If a well is completed in the Niobrara formation and pumps only produced water from that formation, it will be producing water from a depth below these designated basin aquifers and will not trigger these Designated Basin Rules. However, should those same wells also be completed and withdraw water in some shallower formations, or if a separate well is proposed to be completed in those designated aquifers for water supply purposes, then the Designated Basin Rules or Denver Basin Rules described below could apply. As a result, if a Niobrara operator (or its vendor or contractor) withdraws or obtains ground water that originates from some other formation or location, then different laws and rules applicable to those formations and locations would be triggered. Therefore, because Niobrara operators are likely to need water for fracking or other uses from other formations or locations, we briefly summarize below the law and regulations applicable to those designated basins and the Denver Basin.

With respect to the disposal of produced water and other E&P-related waste water from Niobrara operations in Colorado, by far the most common method of disposal is underground injection, which is regulated and permitted by the Colorado Oil and Gas Conservation Commission ("COGCC"). COGCC rules also authorize the permitting and use of evaporation pits, road spreading, surface discharge, and other measures, subject to the specific permitting, operational, and mitigation measures required under applicable regulations, as described below. While most of these disposal methods are available and used in other states, operators should take care to comply with the specific permitting, mitigation, and reporting requirements set out in the Colorado rules described below.

II. Acquiring and Using Water for Niobrara Formation Operations in Colorado

This section summarizes the requirements for obtaining several different types of water in Colorado that Niobrara operators may use for exploration and production operations.

A. Overview of Unique Colorado System of Water Rights

While tributary surface and ground water is generally administered under a priority system common to most western states, Colorado has created exceptions to that system and adopted a complex scheme of regulating and allocating three other different types of ground water that have their own unique criteria and requirements, which generally are tied to the overlying surface ownership. In addition, when one category of such waters, "nontributary" ground water, is withdrawn as "produced water" in connection with oil and gas production, it has yet another set of criteria for how it is regulated and can be used, which is not tied to surface ownership. Each of these categories is described further below.

1. Constitutional Right to Use Water In or Tributary to a Natural Stream

Unlike in the eastern United States, the right to use water in Colorado and much of the West is generally unrelated to ownership of the adjacent or overlying land, with some important exceptions described below, some of which apply in eastern Colorado. Colorado, like most

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Western states, generally follows the "prior appropriation doctrine," which administers water on the basis of "first in time is first in right".¹ In other words, older initiated rights, or "senior rights," have priority over subsequent "junior rights."² If at a given time there is not sufficient water to satisfy all water right holders, the senior rights get their water first, until all the water is spoken for. There is no sharing of shortages among water right holders.

This key concept...