Oil, Gas Slowdown Affects Water Law Practice, Attorneys Say

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By Lars-Eric Hedberg

Dec. 29 — On most law firm websites, visitors will notice links to practices and industries alongside links for attorney names, contact information and office locations. The practices, such as appellate, criminal, civil, regulatory and white collar, are areas of legal representation the firm offers, whereas the industries—automotive, energy and telecommunications, among them—reveal the types businesses the firm represents.

Growth or stagnation in certain industries can affect the legal profession and certain practices in particular. For example, federal and state health-care expansion drives health-care law, and an aging population drives elder law.

Likewise, water lawyers say, changes in the oil and gas industry, including the current drop in prices, can affect the practice of water law.

In June 2014, Brent crude or sweet light crude oil, the major benchmark for pricing oil, traded at nearly $115 per barrel. As of Dec. 29, the price had dipped to under $40 on the Intercontinental Exchange.

Similarly, natural gas futures traded at over $6 per one million Btu in February 2014 but have fallen to under $2.50 per MMBtu as of Dec. 29.

According to some water law attorneys in Colorado, as the price for oil and gas falls and industry activity slows, the size of the associated legal practices also contracts.

“Two years ago we were relatively busy on water law work for oil and gas companies, and this was a notable part of the firm's practice,” Kent Holsinger, founder of Holsinger Law LLC in Denver and special counsel to the Colorado Oil & GasAssociation on water issues, told Bloomberg BNA. “That level of oil and gas activity is definitely behind us, although we are still working on some deals for companies to lease water from agricultural interests.”

Others say that changes in the industry affect their practice to a lesser degree because securing water rights requires long-term planning, and the prices of commodities will not remain stagnant.

“The slowdown in the oil and gas industry is somewhat impacting the practice, but companies' need for water law counsel never goes away because they must be positioned for when prices change,” Mark Hamilton, a partner in the Aspen office of Holland & Hart LLP, told Bloomberg BNA. “The industry does affect water transactions, but it isn't so dramatic because companies must focus on long-term planning.”

Water Leases, Rights Work Affected

Among other things, the practice of water law in an oil and gas context involves representing clients in water lease agreements and helping them change the beneficial use of a water right to allow for drilling.

Overall, Holsinger said oil and gas companies have been more interested in leasing water rights than purchasing them.

“Companies enter into lease agreements when water supplies are needed and available, usually for short periods of time,” he said. “This is advantageous for the farmers and ranchers, who wish to retain ownership of their rights, and for oil and gas companies seeking a short term or temporary solution for their water needs.”

When an oil and gas company and a ranch agree to change a water right use from livestock to industrial, or change the place of use or point of diversion, they must ensure it will not injure other water rights, especially junior rights in the prior appropriation system.

“If these agreements are temporary or short term, such as one to three years, the permitting official or state engineer can approve the change of use,” said Hamilton. “If the change of use sought is permanent or long term, the parties must seek a decree from the Water Court.”

The key question is will a junior water right holder be injured if the water is put to the proposed use, Hamilton said.

“How much did the existing use actually use and in what season are among the issues,” Hamilton said. “Will a cap or alternate location be required?”

According to Kevin Patrick, a shareholder at Patrick, Miller, Noto PC and a Water Law & Policy Monitor advisory board member, a company must show the proposed use would not injure other rights if a change of water right, Substitute Supply Plan or plan for augmentation is involved.

Colo. Rev. Stat. § 37-92-308 “allows temporary (annual) replacement plans under certain conditions,” Patrick told Bloomberg BNA. “So if the use is of very limited duration, this is always an option.”

‘Less Work Today'

Holsinger and Patrick agreed that since oil and gas prices began to fall, the amount of work for water law practitioners related to the industry has declined.

“Overall, there is definitely less work today on water issues related to oil and gas,” he said. “However, water law firms have not been impacted to the same degree as oil and gas-specific firms.”

He said that although there is less work for water law practices, the diversity of clients has helped firms avoid the fate of those that focused solely on energy or oil and gas.

The Houston boutique energy law firm Burleson LLP recently announced it would close, and other boutique energy firms have laid off attorneys as a result of the oil and gas slowdown .

Holsinger also said that despite the slowdown, he is still working on behalf of some clients to secure decreed water for Niobrara shale formation operations in the Denver-Julesburg Basin.

Water Quality, Secondary Effects Felt

Falling oil and gas prices have not only affected water law business but also water as a stand-alone commodity and businesses involved in providing support to oil and gas operations.

“Since the fall of oil and gas prices, we have seen a steady decline in activity, a veritable standstill in all new drilling and permitting,” Patrick said. “We have also seen a fall in the overall value of water as the pressure on prices caused by drilling has fallen off.”

Patrick said that his firm represents half a dozen producers/drillers, two of which are major oil and gas companies, and work from these companies for the firm has “declined dramatically.”

The need for fewer leases and change decrees, prevalent only a few years ago, is affecting the practice, he added.

“We have seen leases not being renewed and a wholesale exodus in some areas which is impacting the continued viability of conditional decreed water rights,” Patrick said.

In addition to the drop-off in water rights work associated with oil and gas activities, Patrick said the amount of water-quality work attributable to these activities has declined.

“Water-quality business has slowed because produced water permits are taken out when a well is developed, and the number of wells being developed is declining due to the market,” he said.

He also said the oil and gas industry slowdown has affected legal work for businesses providing ancillary services.

“We represented a large transporter of water that has gone out of business,” Patrick said.

Water Law a ‘Long Game'

Hamilton, in contrast, said that although the industry slowdown has affected the business of water law, the nature of the practice means that the effects have not been drastic.

“The proportion of business attributable to oil and gas has been slowing a little bit, but water law is a long game, and work has historically been regular,” Hamilton said.

The long process it takes to secure water rights and the evolving regulatory and legal framework mean that water law business remains steady, not slow or speedy, as the fortunes of industries and the economy change, according to Hamilton.

“The industry must comply with regulations and a detailed regulatory process,” Hamilton said. “Regulatory changes and precedent-setting court rulings have and will require water law counseling.”

He also said that because securing water is not a quick process, work continues during an industry slowdown.

“It takes years to put together a water plan, which means a company cannot start and stop the process based solely on an economic scenario,” Hamilton said. “Clients are still doing long-term planning for the water rights transactions, including consolidations.”

The water court process also takes time, especially if a party appeals an adverse ruling to the Colorado Supreme Court.

For example, a Colorado city, which owns a corporation holding water rights, initiated a change of water rights in the water court in December 2009. As of Dec. 29, the Colorado Supreme Court had not yet issued a decision on an appeal of thewater court's ruling on the change application (Grand Valley Water Users v. Busk-Ivanhoe, Inc., Colo., No. 14SA303, oral arguments 6/2/15).

“Water right consolidations and transactions for the industry still require traditional due diligence work, so things are happening and we don't expect them to stop,” he said.

He noted that other legal practices are far more reliant on certain industry or the economy.

“A real estate practice doing purchase and sale work is dependent on the real estate market,” Hamilton said. “And a bankruptcy practice has little work in a good economy, whereas an intellectual property practice has little work in a bad economy.”

In contrast, “municipal water supply issues for Colorado's growing population remain consistent, so work is steady,” Hamilton concluded.

Practical Water Law Effects

In addition to the business of water law, the oil and gas industry slowdown has also affected the practice.

As an example, Patrick pointed to the issue of conditional water rights and related applications for diligence findings filed in the water court.

A conditional water right granted by the water court acts as a placeholder in the prior appropriation system while the holder works toward putting the water to a beneficial use. The holder must show the water court every six years that it is making reasonable efforts toward putting the water to beneficial use.

“We are now drafting all our continued diligence proceedings in Colorado with a certain clause in an attempt to avoid cancellation of client water rights for nonuse and lack of diligent development,” Patrick said.

The clause states that economic conditions are outside of the applicant's control and, despite the applicant's intent and actions, impede its efforts to develop the conditional water right. Moreover, the water court should consider these economic conditions when it reviews the facts and circumstances surrounding the activities undertaken during the diligence period, according to the clause.

Hamilton said that the law recognizes that there will be good times and bad times to pursue a beneficial use.

“There are conditional water rights in the northwest part of Colorado where it is more difficult to extract minerals from oil shale,” Hamilton said. “These rights have been on the books for roughly 50 years and the diligence applications tend to be granted by the water court.”

Hamilton said it is possible these rights could be cancelled or forfeited, but the law takes the long view.

“When the price of the commodity drops, making extraction not economically feasible, the law has recognized these changed conditions,” he said. “The holders of these conditional rights can show the water court they are diligently working toward putting the conditional water rights to a beneficial use by assessing production opportunities.”

To contact the reporter on this story: Lars-Eric Hedberg in Washington at lhedberg@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com