First Temporary Lease of Water for Energy Approved in Montana

6/2/2014 | COLLEEN COYLE

First Temporary Lease of Water for Energy Approved in Montana

A few weeks ago, the Montana Dept. of Natural Resources granted the first temporary lease of water under the new Section 85-2-427, MCA statutory process. The process was created to expedite water leasing for oil and gas development. The Water Sage team is excited to share insights and analysis of policy developments as Western states adapt their legal frameworks to facilitate transactions around water resources.

The first temporary lease of water under Section 85-2-427, MCA was granted by the Montana Department of Natural Resources and Conservation (DNRC) a few weeks ago.  Arrowhead LLC of Gillette, Wyoming successfully petitioned to lease an instream stock water right to Big Metal Coal Company for dust control and coal exploration.  The water right was historically used for 600 cows, which drank directly from the source, with a consumptive use determined at 10.2 acre feet.  The application sought to lease 35 gallons per minute, with a volume of .5 acre feet.

Section 85-2-427, MCA was passed by the 2013 Montana Legislature.  The bill was initiated by the DNRC to try to address the needs for oil and gas development from increased activity in the Bakken formation.  It was drafted with participation from parties representing a variety of interests, including industry, land owner, and environmental groups.  The law provides a streamlined process for temporary use of water for purposes including oil and gas development and industrial uses.  It allows a water right owner to lease their water right for two years during any consecutive 10 year period.  The lease may not exceed 180 acre feet per year, and may be leased only during the period of diversion specified for the right.

Two important features of the law are intended to protect other water users on the source.  The point of diversion for the right cannot be changed or moved, so water must be diverted at the water right owner’s diversion point.  Also, the water right owner cannot irrigate the lands associated with the leased right, even if the water right owner has other water rights that could be used on those lands.  As a practical matter, water would usually be removed at the point of diversion by truck or other means and transported to the temporary use.  These limits protect other users on the source, but also limit the applicability of the temporary lease statute for mining and other development purposes, because they often need to temporarily change the point of diversion.

According to Kim Overcast, DNRC Billings Regional Manager, three temporary lease applications have been filed statewide since the passage of Section 85-2-427, MCA, including the Arrowhead LLC application that was granted this month.  The other two applications were withdrawn when those applicants realized the quantity of water that could be leased would be insufficient for their needs.

A substantial amount of water is used for fracking purposes in the Bakken formation, although the majority of this water is diverted and used in North Dakota. The Montana Bureau of Mines and Geology (MBMG) estimates that between ½ and 10 million gallons of water are required per well for hydraulic fracturing in the Bakken and Three Forks formations.  As more rigs move into Montana, we can expect water demand for oil and gas development to grow.  The temporary leasing statute is not the only method for obtaining water for energy development in Montana, but given the significant amount of water being used for this purpose, these applications seem quite inadequate for the demand.

Municipalities have been marketing water for energy development through their municipal water rights.  If the municipality creates a water depot which is located within city boundaries or the historic place of use, and does not expand its water right, then a change authorization is not generally required.  Water depots of this nature are a significant source of water in the Bakken and many other oil and gas plays in the West. Water rights with an industrial purpose can also be used for energy development, as long as the water is used within the place of use of the water right.

In some areas, it is possible to apply for a new permit to appropriate surface water, drill a new groundwater well, or apply for a change authorization to an existing water right.  Exempt wells, which are under 35 gallons per minute and 10 acre-feet per year, may also be used in certain locations, and at this time they are not subject to the notice and adverse effect requirements of new appropriations for larger wells.  A filing is required within 60 days of use for exempt wells.

The administrative processes to complete a new appropriation of water or a change authorization require public notice, and the applicant must meet statutory requirements including a demonstration that other water users will not be adversely affected by the proposed new appropriation or change.  The temporary leasing statute requires an analysis of potential adverse effects, but it can generally be completed in much less time than a new appropriation or change.  The public notice for the Arrowhead LLC application was issued on February 5, 2014, so the application was granted less than four months after the public notice.

Complete language of the temporary leasing statute, Section 85-2-427, MCA is found HERE

The application form for the temporary lease under Section 85-2-427, MCA is a Form 650, found HERE