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Hey Oil and Gas Companies, Are You In Possession of Illegal Water?

6/23/2016 | SPENCER WILLIAMS

Hey Oil and Gas Companies, Are You In Possession of Illegal Water?
Spencer Williams

Spencer Williams | Director of Business Development | Bio

What if an oil and gas operator purchases water knowing that the seller deceptively purchased it for agricultural use? Does it make a difference if the operator is unaware of any deception, but knows that the water isn’t approved for industrial use? Water Sage tackles the question of stolen water in Colorado.

Everyone knows the most recent oil and gas boom made a significant splash in the Colorado water community.  While the quantity of water used for oil and gas in Colorado is less than one-tenth of one percent, if you ask local elected officials or the general public about fracking, water-related issues top their list of questions and concerns. Environmentalists successfully made water a wedge issue and the industry has at times clashed over water quality and quantity issues.  Oilfield service providers developed water supplies, cities leased water to operators, and lawyers and consultants took an astute interest in advising oil companies on Colorado’s complex water laws and regulations.

Earlier this year, multiple news sources reported the arrest of two men after Boulder County prosecutors charged them with theft and forgery for buying agricultural water from the City of Boulder and turning around and selling it for industrial use in the oilfield. The water was purchased from the City for $30 per acre foot, and sold for $2,700 per acre foot, netting the accused more than $800,000 in profits.  The City of Boulder does not allow industrial use of agricultural water, or subleasing water purchased from the City, and prosecutors say the theft was committed by deceptively purchasing the water for an unapproved use.

Believe it or not, the standard penalty for illegal water use in Colorado is “curtailment,” where the illegal water use is simply stopped; however the recent events in Boulder County could open the door for more serious consequences for illegal water use.

All water rights in Colorado have specific approved uses.  For instance, a water right used to water a farm is approved for irrigation. That water right cannot be used for any purpose other than irrigation. The State Engineer’s Office, a state agency, enforces these rules and curtails water use that is not approved.   So, the operator who leases irrigation water from the farmer for fracking risks an abrupt halt to its water supply in the event that the State Engineer becomes aware of the illegal use. While this might cause operational delays, logistical inconveniences, and even painful public campaigns against operators, it does not subject the operator to any civil or criminal liability, unlike other regulated actions in the oilfield.

Reading the indictments report in Boulder County brought back vague recollections from my first year in law school and the law of possession of stolen goods.  As the saying goes, possession is nine-tenths of the law.

Sure enough, the Colorado Criminal Code says: “Every person who obtains control over any stolen thing of value, knowing the thing of value to have been stolen by another, may be tried, convicted, and punished whether or not the principal is charged, tried, or convicted.”

So what about an oil and gas operator who purchases water, knowing that the seller deceptively purchased it for agricultural use?  Does it make a difference if the operator is unaware of any deception, but knows that the water isn’t approved for industrial use?  I’ll leave these questions to your legal counsel.

I will say it is unquestionable that the best practice for operators is to confirm where your water supply comes from in advance, and under what claim or right it is being provided.  At a minimum this will ensure your operations continue un-interrupted and it may even keep you out of court.

That’s one of the many reasons Ponderosa Advisors developed Water Sage, a map-based web portal to efficiently search and view water rights information and land ownership.  Water Sage successfully acts as a mitigation tool to reduce an operator’s risk so they can make better informed decisions about how and where to obtain water.

In the overall scheme of an operations plan, water sourcing may just be a drop in the bucket, but getting caught with stolen water in Colorado could land you in hot water, and in the headlines.