January 01, 2013

Produced Water Extraction From Oil and Gas Wells: Implications for Western Water Rights

By all accounts, the United States is experiencing a surge in domestic oil and gas exploration and development. New drilling technologies and methods such as horizontal drilling and hydraulic fracturing have led to extensive development in geographic regions and geologic formations previously believed to be barren or uneconomic. With this rapid growth has come increased regulatory scrutiny on all aspects of the petroleum exploration and production process, including surface use, air emissions, and water quality impacts.

Increasingly, attention is also being focused on the water quantity ramifications of oil and gas production. Drilling and completion can require substantial water supplies, and demand for water is up in booming areas like Eastern Colorado and Western North Dakota. However, most oil and natural gas wells also produce groundwater that is extracted along with the hydrocarbons. This coproduced, or “produced water,” varies widely in quality and quantity, but it is often brackish water, high in dissolved solids and salinity, which is brought up from geologic formations deep below the surface.

It is still water, however, and in the arid states of the Rocky Mountain West, where farmers, miners, and growing cities have been competing for scarce water supplies since the mid-nineteenth century, oil and gas operators are increasingly faced with strict state-law requirements governing the withdrawal and use of this water. This has been particularly evident in Colorado, where the last several years have seen a dramatic change in the regulatory nexus between produced water and the administration of water rights under state law. While other western states such as Wyoming and Montana have wrestled with these issues in the specific context of coal bed methane (CBM) natural gas development, Colorado has taken steps to regulate produced water from all types of oil and gas production. As such, the Colorado experience could be a bellwether of things to come in other western states. As scrutiny on produced water withdrawals increases, it is not surprising that this water is no longer viewed as merely a waste stream; it is increasingly seen as a potentially valuable resource.

Produced water is a natural byproduct of the hydrocarbon extraction process. Many of the geologic formations where oil and gas are found also contain groundwater. After an oil or gas well is completed and placed into production, produced water can continue to flow from the well for long periods of time, sometimes increasing over time, often declining, depending on the quantity of water in the target formation and other factors. Where hydraulic fracturing has been used to complete the well, a significant amount of early water production may be attributed simply to “flowback” of the fluid used in the process (typically comprised mostly of water and sand). In some cases, however, the volume of produced water can be quite high and extend over the life of the well. For example, it is not unheard of for producing oil wells to generate ten barrels of water (an oil-field “barrel” equals forty-two gallons) for every barrel of oil.

Natural gas wells are often “drier,” and they produce less water than conventional oil production. Due to certain unique characteristics, however, CBM production can involve particularly high volumes of produced water. Perhaps as a result of this, the recent regulatory focus on the hydrological impacts of produced water withdrawals has focused almost exclusively on CBM operations.

Until recently, all produced water was regulated primarily as a production waste, and the principal challenges for producers were containment, treatment, and disposal. In addition to salinity and high total dissolved solids, produced water may sometimes contain oil residues and minerals such as barium, calcium, iron, and magnesium. As a result of these water quality concerns, produced water typically is collected at the wellhead and disposed of through one of the following methods: deep injection wells, surface evaporation pits, or surface discharge. (Treatment is sometimes required.)

As pressure on scarce water supplies continues to grow, however, more attention is being paid to the sheer quantities of produced water and the possible hydrologic impacts to surface and groundwater supplies. In the arid western states, where reliable water rights are of paramount importance, lowering of groundwater levels and depletion of surface streams can result in legally cognizable injury to vested, “senior” water rights.

Montana and Wyoming, which have been the site of extensive CBM development over the last ten to fifteen years, have grappled with the integration of CBM development into existing surface and groundwater management regimes. Perhaps most dramatically, however, in Colorado a recent Colorado Supreme Court decision, followed by legislative and regulatory changes, has led to broad regulation of produced water under the Colorado water rights laws.

As with Montana and Wyoming, the focus in Colorado began with CBM production. CBM gas is found in thin coal seams that are often closer to the surface than traditional oil and gas producing formations. As such, CBM wells typically are completed at shallower intervals than traditional wells and are more likely to have some hydrologic connection to potable aquifers or surface water supplies. The withdrawal of water itself also plays a unique role in CBM production. CBM gas is held in place in the cleats of the coal by hydrostatic pressure in water-saturated coal seams. In order to produce the gas, the coal seam must be dewatered. This is typically accomplished by the well itself, which pumps out water through one chamber of the well bore while gas is allowed to rise to the well head through a separate pipe. As with all produced water, water from CBM production varies widely in quality and quantity.

The Colorado Experience

Since 2009, there has been a rapid shift in the regulatory landscape regarding produced water in Colorado. While other western states have addressed produced water issues in the context of CBM production, only Colorado has focused broadly on the hydrologic impacts of produced water from all types of oil and gas development. The Colorado State Engineer now takes the position that he must administer the more than 40,000 oil and gas wells in Colorado pursuant to Colorado’s water rights and groundwater management laws. This is a dramatic change from prior practice which observed a clear delineation between oil and gas extraction and water rights administration. The shift has resulted in the expenditure of tremendous resources by the industry in order to adapt and comply with the new requirements. With increasing development, continued regulatory pressure, and greater competition for water resources, the Colorado experience could be a preview of things to come in other states.

Colorado, like most arid western states, allocates rights to water based on the “prior appropriation doctrine.” The essence of this doctrine, which is enshrined in the State Constitution, is that while ownership of the water resource lies in the public, all persons have the right to use the water for beneficial purposes (sometimes referred to as a usufructuary right). Allocation of water among competing uses rests upon the fundamental maxim of “first in time, first in right.” A person who diverts water and applies it to a beneficial use accomplishes an “appropriation” of a water right, and he or she acquires a priority date that is then superior to all subsequent, or “junior,” appropriations. The concept of “beneficial use” is integral to this system. A legitimate beneficial use defines the scope of the water right and prevents speculation and waste.

In times of shortage, senior water rights may place a “call” for water, and junior appropriators are required to curtail their diversions until the senior water right is satisfied. Many senior water rights in Colorado have priorities dating to the nineteenth century, and during dry periods it is not uncommon for only the most senior water rights to be allowed to divert.

With respect to groundwater, Colorado law makes an important distinction between “nontributary” and tributary groundwater. Nontributary groundwater, which is defined by statute, is water the withdrawal of which will not have a significant effect on surface waters, either because of its depth or unique geology. See Colo. Rev. Stat. § 37-90-103 (10.5) (2012) (definition of nontributary groundwater). Tributary groundwater, by contrast, is water which is deemed to be hydrologically connected to surface water supplies. A legal presumption exists in Colorado that groundwater is tributary, absent proof to the contrary, and tributary groundwater has been integrated into the administration of surface water according to the priority system. Nontributary groundwater is not subject to the priority system and is generally allocated according to overlying land ownership.

To protect senior water rights while still ensuring maximization of beneficial use, Colorado has enacted comprehensive and detailed laws for the determination and administration of water rights. Water rights are adjudicated in special “water courts,” and are administered by the State Engineer. Administration of water rights is serious business in Colorado; it is unlawful to even collect rainwater off a rooftop without a water right or other special approval.

Like other western states, however, Colorado water law includes limited exceptions for dewatering of mines, construction sites, and other instances where groundwater is simply in the way of another industrial activity (other states sometimes refer to this as “byproduct water”). The Colorado Ground Water Management Act provides an exception to the general requirement for permits for water wells, providing that “in the case of dewatering of geologic formations by withdrawing nontributary ground water to facilitate or permit the mining of minerals . . . no permit shall be required . . . unless the water will be beneficially used.” Colo. Rev. Stat. § 37-90-137(7) (2012). After a Colorado water court ruled that “mining of minerals” included oil and gas production, this seemingly innocuous provision quickly became the focal point of a major reform in the regulation of produced water in Colorado.

Historically, the Colorado State Engineer took the position that produced water was a waste stream under the exclusive jurisdiction of the Colorado Oil and Gas Conservation Commission. Accordingly, the State Engineer’s Office refused to regulate produced water as either a diversion of water to beneficial use or an unlawful waste of water. In the late 1990s and early 2000s, however, concerns began to grow about the impact that increased withdrawals associated with CBM production could have on groundwater levels and streams flows, particularly in the San Juan Basin in southwestern Colorado.

In 2005, a group of landowners who owned water rights in the San Juan Basin brought a lawsuit in water court, seeking to confirm the obligation of the State Engineer to regulate CBM wells. Vance, et al. v. Simpson, Case No. 2005CW63, Water Division 7. Specifically, the landowners sought a declaration that withdrawal of produced water to facilitate CBM production was a beneficial use of water under state law, and that the State Engineer therefore had a nondiscretionary duty to require the CBM wells to obtain water well permits and, in over-appropriated basins, court-approved “augmentation plans” to replace out-of-priority depletions.

In 2007 the local water court ruled in the plaintiffs’ favor, and in 2009 the Colorado Supreme Court affirmed. The Supreme Court held that the mere extraction of produced water in connection with CBM production was itself a beneficial use, giving rise to an appropriative water right under Colorado law. Vance v. Wolfe, 205 P.3d 1165 (Colo. 2009). As such, the Court ruled that CBM wells are subject to well permitting, adjudication, and priority administration under Colorado water laws.

While the Vance case was decided on the unique facts of CBM production (where dewatering of coal seams was deemed “integral” to the ability to produce gas), the broader implications were quickly felt throughout Colorado’s oil and gas industry. In anticipation of the Supreme Court decision, the State Engineer took the position that his office was required to consider the need to permit and administer not only CBM wells, but all of the existing oil and gas wells in Colorado (at the time, more than 35,000 wells).

The Colorado legislature was also concerned about the potential impact of the Vance case on the oil and gas industry in Colorado, and the administrative burden on the limited resources of the State Engineer’s Office (particularly in view of the relatively small volumes of water at issue for most wells). In April of 2009, shortly before the Supreme Court issued its opinion, the General Assembly introduced House Bill 09-1303 (HB 1303). The bill, which became law in June 2009, accomplished three primary objectives: first, it established a “time out,” or reasonable period of delay, before oil and gas wells would be required to obtain water well permits; second, it provided an additional transition period during which operators of CBM wells that withdrew tributary ground water could seek administrative approval of temporary replacement plans to allow the wells to operate out-of-priority without having to obtain water court approval; and finally, HB 1303 authorized the State Engineer to adopt rules to assist in the administration of C.R.S. § 37-90-137(7).

Colorado law exempts oil and gas wells that withdraw nontributary produced water from the water well permitting requirements, and more broadly from administration within the priority system. As a result, the State Engineer used the administrative rulemaking process authorized by the legislature as a means to expeditiously identify geographic areas and geologic formations where produced water met the statutory definition of nontributary. Prior to the Vance decision and HB 1303, requests for determinations of nontributary ground water were handled by the State Engineer’s Office on a case-by-case basis, often without formal public notice.

In order to make a rulemaking determination that would assist with the administration of the thousands of oil and gas wells that likely produced nontributary ground water (many oil and gas wells are thousands of feet deep and are completed in formations that are hydrologically remote from surface water supplies), the State Engineer solicited “alternate rule” proposals from interested parties and requested evidence that provided a technical basis for determining certain areas and formations where ground water was nontributary. Rulemaking hearings took place during December of 2009 and January 2010, with the State Engineer, Dick Wolfe, serving as the Hearing Officer. Many oil and gas companies filed for party status, together with numerous water users, citizens groups, and the Southern Ute Indian Tribe. Interested parties submitted alternate rule proposals, including proposed nontributary determinations in diverse geologic formations located around the state. Extensive technical evidence was submitted in the form of groundwater flow models and stream depletion analyses based on site specific data and literature values for the target formations, supported by expert testimony from engineers, hydrologists, and geologists.

The final “Produced Nontributary Ground Water Rules” were issued in December of 2009 and January of 2010. 2 C.C.R. 402-17. In all, there were more than two dozen discrete areas and formations designated as nontributary throughout the state. The final rules also contain procedures by which interested parties may seek additional nontributary determinations in the future (to date, several additional determinations have been made pursuant to these provisions). Although the final rules were appealed, the water court ultimately upheld the rules in almost all material respects, and most aspects of the water court decision were not appealed.

As a result of the Vance case, HB 1303, and the State Engineer’s Produced Nontributary Ground Water Rules, all oil and gas wells in Colorado that produce water are now potentially subject to regulation under state water laws. All CBM wells, which under the holding in Vance are deemed to place produced water to beneficial use by merely extracting it, are required to have water well permits issued by the Division of Water Resources. In over-appropriated basins, oil and gas wells that produce tributary groundwater are required to obtain approval of augmentation plans or temporary replacement plans that prevent injury to senior water rights.

Regulation of Produced Water Withdrawals in Other Western States

While no other states currently regulate the potential hydrologic impacts of produced water withdrawals as actively as Colorado, this issue has come up in other western states, primarily in the context of CBM production. Wyoming’s Powder River Basin is the site of extensive CBM development. Years before the Vance case was decided in Colorado, Wyoming already considered production of water by CBM wells to be a beneficial use and required a “beneficial use permit” (the equivalent of a water well permit in Colorado) issued by the Wyoming State Engineer. Such permits were routinely granted for thousands of CBM wells, and typically did not impose any limits on the quantity of water that could be produced.

In a lawsuit reminiscent of the Vance case, in 2007 a group of landowners brought suit against the Wyoming State Engineer seeking to enjoin the permitting of CBM wells on the grounds that, among other things, the State Engineer was allegedly not properly considering the public interest when allocating the state’s water. William F. West Ranch, LLC v. Tyrrell, 206 P.3d 722 (Wyo. 2009). It is interesting that while the plaintiffs in the Vance case sought to force the Colorado State Engineer to administer CBM produced water as a beneficial use, including the issuance of well permits, in the Tyrrell case, plaintiffs sought to restrain the Wyoming State Engineer from granting beneficial use permits without appropriate restrictions. The Wyoming Supreme Court ultimately upheld the trial court’s dismissal of the complaint, on the grounds that the plaintiffs’ claims were too general to be justiciable and that the plaintiffs had failed to exhaust administrative remedies. The Tyrrell Court sounded a warning, however, stating that by its decision it did not necessarily approve of Wyoming’s existing regulatory scheme for CBM produced water.

Meanwhile, in 2008 the United States Supreme Court accepted original jurisdiction in Montana v. Wyoming, a bill of complaint by the State of Montana against Wyoming for violations of the Yellowstone River Compact (Compact). (North Dakota was named as a codefendant based on its status as a signatory of the Compact.) Among the allegations of the complaint was that Wyoming had “allowed the pumping of groundwater associated with coalbed methane production in the Tongue and Powder River Basins, in violation of Montana’s rights under . . . the Compact.” While the Supreme Court has not yet formally ruled on Montana’s CBM claim, the Special Master did conclude that groundwater withdrawals that are hydrologically connected to surface water are within the scope of the Compact, and that Wyoming would be in violation of the Compact if it is shown that Wyoming is allowing produced water withdrawals from CBM development to deplete the Yellowstone River to the injury of Montana’s rights under the Compact. Accordingly, Montana and Wyoming may be on a course to litigate, at a federal interstate level, the same basic issue that gave rise to the Vance case in Colorado: the possibility that produced water withdrawals associated with CBM development deplete surface water supplies and cause injury to vested water rights.

The Future: Produced Water as a New Resource

With Colorado now actively regulating the impact of tributary produced water withdrawals on vested water rights, and states like Montana and Wyoming moving in a similar direction, it is perhaps not surprising that produced water is increasingly being viewed as a valuable water resource in its own right. With increasing demand for water supplies for drilling and hydraulic fracturing, many oil and gas companies are seeing the obvious benefits in recycling and reuse of produced water. Several entrepreneurial companies have also entered this market, offering “cradle to grave” water supply, treatment, and disposal strategies.

In 2010, the Colorado Legislature recognized and encouraged the reuse of produced water when it enacted Senate Bill 10-165 (SB 165). Coming on the heels of the Vance decision and HB 1303, SB 165 provides an exception to the requirement of a water well permit, where nontributary produced water is put to subsequent beneficial use (within the basin of origin) for ordinary oil field purposes such as drilling, well stimulation, and well maintenance. See Colo. Rev. Stat. § 37-90-137(7)(a).

Depending upon quality, CBM produced water has for many years been used successfully in Colorado and Wyoming as a supply for irrigation, and stock and wildlife watering. In other states including New Mexico, produced water from CBM has also been considered as a potential supply for multiple uses including agriculture and even power plant cooling. As competition for scarce water supplies increases in the arid West, along with demand for new water supplies for drilling and hydraulic fracturing, look for produced water to be continue to be viewed (and regulated) less as a waste stream and more as an important water supply. Ultimately, it should not be surprising if more western states integrate produced water into their state-law water rights regimes, much as Colorado has done.