The Other Black Gold

Historically, water has been a nuisance in oil and gas production because companies have to transport and dispose of water that is produced along with the fuel that is pulled from the reservoir.  However, produced water became even more of a nuisance for coal bed methane (“CBM”) producers in 2009 after the Colorado Supreme Court held in Vance v. Wolfe that dewatering of a coal bed to produce methane gas was a beneficial use as defined by the Ground Water Act of 1969.  The Vance ruling made it so CBM producers have to obtain a water well permit and an augmentation plan to protect vested water rights when dewatering a coal bed to produce methane gas.

However, the Vance decision left the door open for produced water to become an asset instead of a nuisance for traditional and shale wells.  The decision clarified that the State Engineer, not the Colorado Oil and Gas Conservation Commission, has the authority to regulate produced water.  Produced water from these operations is naturally occurring brackish or brine water that was trapped in the oil reservoir.  This regulatory authority, codified in Colo. Rev. Stat. § 37-90-137(7)(c), allows the State Engineer to classify Colorado’s formations and basins, in whole or in part, as nontributary groundwater for the purpose of dewatering for mineral extraction.  In Colo. Rev. Stat. § 37-90-137(7)(a), the state legislature authorized non-CBM operators to use nontributary groundwater removed during extraction for various drilling operations within the same basin including well stimulation, well maintenance, dust control, pump operation, injection in a properly permitted disposal well, and disposal at a properly permitted commercial facility without a water well permit.

This development presents non-CBM operators with the unique opportunity to harness produced water from designated nontributary groundwater formations and basins for a variety of purposes without being subject to the state doctrine of prior appropriation.  In essence, as long as the same operator continues to use the produced water in the same basin for any of the enumerated uses above, the operator can use the water to its extinction and can transfer it without ever being subject to challenges of injury under the doctrine prior appropriation.  The ability to obtain and use water that is not subject to prior appropriation rather than lease or purchase water rights has the potential to save the oil and gas industry a substantial amount of money.  The economic impact for the oil and gas industry, as well as other industries, could be tremendous given that oil and gas operations produced more than 41,000 acre-feet of water in 2012.

The potential to use produced water for well stimulation could be a game changer in Colorado where approximately ninety-five percent of new wells are stimulated by hydraulic fracturing (“fracking”). Fracking a vertical or directional well requires between 100,000-1,000,000 gallons of water per well, while fracking a horizontal well require two to five million gallons of water per well.  Clearly, when the industry is thriving their water needs quickly increase putting added strain on Colorado’s stressed water supply.

For example, in 2012, 1500 vertical/directional wells were drilled and 1000 horizontal wells were drilled using approximately 19,947 acre-feet of water accounting for 0.13% of Colorado’s total water use.  Even if operators use a mixture of freshwater and produced water for fracking, their savings would be immense given the rising prices of water in Colorado.

Furthermore, oil and gas operations in Texas have already begun to experiment with using a mixture of brackish water and produced water in the fracking process with some success.  However, using produced water presents several challenges, because produced water contains metal salts, and can range from brackish water (which is less saline than sea water) to brine water (which is more saline than sea water).  The salt and mineral makeup of produced water reacts differently given the type of rock formation or chemicals used in the fracking fluid, which requires operators to vary formulas.  Despite the challenges and costs associated with varying formulas, the use of produced water for fracking in Colorado could save operators money, especially if they could become a self-sustaining water user, and thereby decrease demand for freshwater reducing the price for other industries around the state.

In addition to permitted drilling operation uses, non-CBM operators are also authorized to dispose of nontributary produced water without a water well permit by injection in a properly permitted disposal well, or at a properly permitted commercial facility.  Most oil and gas producers prefer to dispose of wastewater through injection wells because it is cost effective and quick.  However, environmental pushback and concerns about increased seismic activity around injection sites has made water treatment a more attractive option, which has pushed the industry to innovate and become more cost effective.  Along these same lines, the water treatment industry has been able to successfully turn even brine water into freshwater through the process of reverse osmosis, which makes recycled water a viable option for a variety of uses.

If treatment becomes even more cost effective, then recycling produced water could be an attractive venture in drought-stricken states like Colorado where oil and gas, and other water intensive industries are major economic drivers. In 2015, Colorado came in as the sixth highest producer of natural gas in the United States and the seventh highest producer of crude oil in August, 2016.  The oil and gas industry contributes over thirty-one billion dollars to the state’s economy in 2014. Colorado was also the twenty second highest agriculture producing state in 2015, and the agricultural industry in Colorado uses eighty-nine percent of consumed water.  Agriculture also contributes forty-one billion dollars to the state’s economy. Recycling produced water that could be used for agriculture could protect the industry as the state’s population grows and municipal demands grow.

The impact of using treated or desalinated water can be seen in Israel where treated sources are almost the exclusive source of water for the agricultural industry. Additionally, recycled water could be used for river recharge or as augmentation water for shallow freshwater basins.

Nevertheless, recycling produced water to be used in other industries raises questions about classification and ownership. Colo. Rev. Stat. § 37-90-137(7)(a) states that, in regard to nontributary groundwater, an operator does not need a well permit unless the produced water will be beneficially used—which recycling for future use would seem to be.  However, Colo. Rev. Stat. § 37-90-137(7)(c) allows non-CBM to dispose of water at a properly permitted commercial facility without having to obtain a well permit—which seems to label recycling of produced water as not a “beneficial use” within the definition of the Groundwater Act of 1969.  Theoretically water treatment facilities could be producing freshwater from a nontributary source that in turn could be used for a variety beneficial uses.  Thus, despite the costs of recycling the produced water, whoever owns the produced water could then sell, trade, or augment a water source with water that to that point hasn’t been subject to prior appropriation.

Ultimately, the administrative leeway encourages non-CBM producers to properly dispose of water by not imposing the costs of well permitting or augmentation plans, but also creates a situation where a new water source could be created without being subject to prior appropriation.  Even if the newly recycled water would be subject to prior appropriation upon sale or trade, the owner of the newly recycled produced water could potentially gain financially without having to obtain a water well permit to recover the water in the first place.  Therefore, mineral rights agreements between the oil and gas producer and the lessor would be critical to establish who owns the nontributary produced water. However, there is dicta in the Colorado Supreme Court case, Board of County Commissioners of County of Park v. Park County Sportsmen’s Ranch, LLP (“Park County Sportsmen’s Ranch”) that could further complicate the analysis.

Park County Sportsmen’s Ranch was a 2002 case involving a trespass claim from artificial recharge into storage space in subsurface aquifers.  In the case, the Colorado Supreme Court accepted the Ohio Supreme Court’s rationale that surface owners do not enjoy absolute ownership of waters below their land, because the water below their properties, including the native brine, are classified as waters of the state.  The Colorado Supreme Court found this distinction particularly significant to Colorado’s long standing constitutional, statutory, and jurisprudence that all water in the state is a public resource which the state decrees rights to.  Starting from the foundation that there are limitations to absolute subsurface rights, and that all water in Colorado is public including the native brine, it seems that the state, surface owner, split estate subsurface owner, and producer could all have claims to the produced water.

Ultimately, post Vance v. Wolfe rulemaking was positive in the respect that it cut administrative costs for non-CBM producers and the state by not requiring a water well permit for nontributary produced water.  The rulemaking also encourages non-CBM producers to use produced water in new ways, and incentivizes them to dispose of produced water properly.  However, the economic benefit of using produced water in new ways and the potential to use recycle produced water for other beneficial uses will sooner or later spark questions of ownership.

Dalton Kelley

Image: Photo of Ambassador Daniel Shapiro’s visit to the Hadera Desalination Plant in Israel. Flickr user U.S. Embassy Tel Aviv, Creative Commons.

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