A Survey of Oklahoma Water Law As it Relates to the Oil and Gas Industry

1. A Survey of Oklahoma Water Law As it Relates to the Oil and Gas Industry Dale E. Cottingham 211 N. Robinson, Suite 1500 One Leadership Square Oklahoma City, OK 73102 (405) 235-5500 (telephone) (405) 235-2875 (facsimile) dcottingham@gablelaw.com November 12, 2009

2. The Basics • Industry needs water for • Drilling and fracturing of an oil or gas well • Enhanced recovery to increase or maintain production of a drilled oil or gas (hydrocarbon) well • Industrial facilities affiliated with oil and gas, e.g. refineries. • Focus of this talk • Emphasis on water for drilling and enhanced recovery • Discussion of Oklahoma • Water as a property resources and water rights arising from water as a resource • Water quality and waste disposal are environmental issues.

3. The Basics • Three sources • Stream water includes natural lakes and ponds, bays, flowing and intermittent streams, springs on surface • Groundwater includes fresh water under the surface of the earth • Diffuse surface water includes water flowing over the ground (rainwater, irrigation runoff) before entering a defined stream

4. Physical Classifications of Water • Water in a "definite stream" (definite, natural channel with defined beds and banks, originating from definite source of supply) – playa lake • Water flowing under the surface but not forming a definite stream is "groundwater" (fresh water under the surface of the earth regardless of the geologic structure in which it is standing or moving outside the cut bank of any definite stream) • Water flowing over the surface not in a definite stream – diffused surface water

5. Arbuckle-Simpson AquiferJohnston County, OK

6. Ownership v. Use • 60 O.S. §60 - "The owner of the land owns water flowing . . . under its surface but not forming a definite stream. The use of groundwater shall be governed by the Oklahoma Groundwater Law. Water running in a definite stream, formed by nature over or under the surface…“ • “may be used by the owner of the land riparian to the stream for domestic uses as defined in Section 105.1 of Title 82 of the Oklahoma Statutes, but he may not prevent the natural flow of the stream, or of the natural spring from which it commences its definite course, nor pursue not pollute the same…” • “as such water then becomes public water and is subject to appropriation for the benefit and welfare of the people of the state, as provided by law ..."

7. Doctrines to Regulate Use of Groundwater • Appropriation – public water; priority in time and beneficial use required; junior rights must cease withdrawal to satisfy senior rights; Oklahoma law from 1949 to 1973; amount of land owned irrelevant • English rule of absolute ownership – affect of withdrawal on others no matter except if withdrawing with intent to cause damage; Texas `right of capture' under attack • American rule of reasonable use – impact on others not determinative if use is reasonable, but reasonableness may include consideration of impact on others; not reasonable to use out-of-area; Oklahoma before 1949 • Correlative rights – mutual or reciprocal rights to a common water source; California `fair and just portion' to overlying landowners; out-of-basin use restricted • Allocation – modified correlative rights; Oklahoma system after 1972, based on quantum of overlying land (surface acres) – more closely ties ownership of land to use

8. Principles of Oklahoma Groundwater Law(82 O.S. §1020.1 et seq.) • OWRB to issue permits to applicants who "own or lease" the land. Easements attached to land – 60 O.S. §49(5) - right of taking water. Easements not attached to land – 60 O.S. §50(6) – right of taking water. Ricks Exploration v. OWRB, 1984 OK 73 Unit Petroleum v. OWRB, 1995 OK 73 • Permit quantity is based on number of acres "owned or leased" • Use must be "beneficial" – reasonable intelligence, reasonable diligence, economically necessary for lawful purpose • No "waste" – by pollution or by depletion

9. Principles of Oklahoma Groundwater Law(82 O.S. §1020.1 et seq.) • "Maximum annual yield“: determinations of the amount that may be withdrawn for each acre overlying a basin; regular permit allocates; legislative quantification of two acre-feet per acre allocation by “temporary” permit before MAY completed • Macro management vs. micro management: • well interference – cone of depression effects • activities that may cause pollution to groundwater • obvious depletion by physical waste – broken pipes, leaks

10. GroundwaterApplicants for Enhanced Recovery Projects • To use fresh groundwater for enhanced recovery of oil or gas, the operator/applicant must provide the following: • Provide a schedule of use • Discuss availability of saltwater • Provide an economic study • Additional cost of saltwater • Comparison of value of fresh water for oil and gas use versus other uses • Provide analysis of waste by pollution • Provide analysis of waste by depletion

11. Groundwater Issues To Address • Groundwater pumping affects on stream and spring flows – conjunctive or integrated use management • Store and preserve groundwater for future generations – compare oil and gas restrictions; at what point does restricting use trigger takings?

12. Stream Water Appropriation • Appropriation - Fundamental Elements: • Priority in time gives the better right • Beneficial use is the basis, measure and limit • Statutory permit elements: • In amount applied for • Applicant has a present or future need for the water • Proposed use is a beneficial use • Shall consider availability of all stream water sources and may consider availability of groundwater as an alternative • Proposed use does not interfere with domestic or existing appropriative uses • If application for transportation of water outside area of origin, proposed use cannot interfere with existing and proposed beneficial uses within the stream system of origin

13. Stream Water Appropriation • No physical/geographical connection to the water source • Eminent domain and access to the water source, 82 O.S. §105.3 – Watchorn Basin v. OG&E • Transferring stream water rights: • Rights to appropriate for irrigation are appurtenant to the land • Transfer possible – if changes made without detriment to existing rights • Use-it-or-lose-it forfeiture – seven years or schedule of use • No "public interest" element in Oklahoma – broad, open-ended authority

14. Riparian Rights Distinguished • Physical/geographical connection to waterbody required • Natural flow doctrine – fiction, but prevents large diversions • Reasonable use doctrine – correlative rights, share the pain of low flows

15. Dual System Franco American Charolaise, Ltd. v. OWRB, 1990 OK 44 • Riparian claims, if determined reasonable, are superior to appropriations • Reasonableness factors case-by-case —footnote 40, Restatement of Torts (2nd) §850A; relative reasonableness • New riparian uses or changes to riparian uses can occur — reasonableness must be determined by a court for each new or changed use; no stability, certainty, security • Franco under attack — Heldermon v. Wright, SC #100,709 • dam construction, release requirement, two riparians • domestic use protection versus reasonable use • 1993 statute confirming 1963 statute — unconstitutional?

16. Stream WaterApplicants for Enhanced Recovery Projects • To use fresh stream water for enhanced recovery of oil or gas, the operator/applicant must provide the following: • Provide a schedule of use • Discuss availability of saltwater • An economic study • Additional cost of saltwater • Comparison of value of fresh water for oil and gas use versus other uses • Provide analysis of waste by pollution • Provide analysis of waste by depletion

17. I appreciate the opportunity to discuss this subject with you. I am happy to answer questions you might have. Dale E. Cottingham 211 N. Robinson, Suite 1500 One Leadership Square Oklahoma City, OK 73102 (405) 235-5500 (telephone) (405) 235-2875 (facsimile) dcottingham@gablelaw.com