Ongoing litigation brings the state’s water troubles into focus, with potential consequences for the oil & gas industry.
Water infrastructure and supply contracts worth millions of dollars are at risk following a recent court victory for the Carlsbad Irrigation District (CID) and Otis Mutual Domestic Water Consumers & Sewage Works Association over the New Mexico Office of the State Engineer (OSE). District Judge Ray Romero issued an order compelling the OSE to revoke preliminary authorizations that had allowed Intrepid Potash and its lessees to pump water from the Pecos River to supply oil & gas producers.
The CID and Otis had argued that the permits had no legal basis and that the OSE violated their due process rights by allowing Intrepid and its lessees, which include Select Energy Services, to pump the 4,700 af/y of water from new diversion points and for a new use without first holding public hearings on the matter.
“You have to give notice so that potentially impacted parties can protect their water rights,” CID and Otis attorney Kenneth Dugan told Water in Oil (WiO). “For whatever reason, the State Engineer decided to ignore those due process rights. Local water Judge Romero ruled that is illegal.”
The authorizations in question are associated with water that Intrepid has claimed for decades, but the amended permits were granted in 2017 and 2018. Intrepid’s core business had for years been potash mining and refining, but as those activities waned, the company became increasingly involved in water sales. The preliminary authorizations are different from the “emergency” permits the OSE can issue under the New Mexico Water Code.
“There is no such thing as an emergency to frac an oil well,” Dugan said, speculating that the OSE may have invented the preliminary authorization process because it could not defend the use of “emergency” permits in such cases. “By the time the permit change is published and there’s a hearing, the water has already been pumped. It all becomes moot and there’s really no way to defend and protect the Pecos River.”
Charles DuMars, Intrepid’s attorney, told WiO that the OSE does in fact have the authority to grant preliminary authorizations under the Water-Use Leasing Act, so long as an internal evaluation determines that they are consistent with water conservation and would not be contrary to the public welfare or impair other water rights.
“In the case of Intrepid, they had an immediate need for the use of the water at a time of expanding demand,” DuMars said, referring to growing oil & gas activity in the region. “The New Mexico State Engineer conducted a preliminary evaluation and granted the preliminary approval.”
Issues not resolved
The OSE and Intrepid have petitioned the New Mexico Supreme Court to stay Judge Romero’s order and hear the case. Dugan expressed doubt that the requests would be granted.
“It’s pretty uncommon for the Supreme Court to rebuke one of its district judges for issuing a ruling in compliance with the law, especially when the law is so clear,” he told WiO, adding that such extraordinary writs are not appropriate for cases that can go through the normal appeals process.
DuMars, on the other hand, is confident the Supreme Court will hear the case for reasons even beyond the immediate burden that Judge Romero’s order will place on the business dealings of Intrepid and Select, which have invested millions of dollars in infrastructure in reliance on the granted preliminary authorizations.
“I cannot imagine that the Supreme Court would allow this massive injury to the role of the New Mexico State Engineer or to the economy of the region without hearing the case in the first instance,” he said. “This is particularly true where the injured parties have never had a chance to make their case.”
Intrepid and Select were denied the right to be heard in the preliminary authorizations case, as the OSE was deemed adequately able to represent the companies’ interests as the issuer of the permits. Regardless, Dugan said the companies did have a direct appeal route, making the Supreme Court petition uncalled for.
If the Supreme Court does take up the case, it might not be resolved for weeks or months. As of end-May, no decision had been made on the matter.
The broader predicament
The suit regarding the validity of the preliminary permits is part of a larger legal battle involving Intrepid’s Pecos River water rights. The company claims 34,315 af/y, of which 19,836 af/y is for consumptive use, meaning that amount does not have to be returned. CID and Otis contend that Intrepid forfeited and/or abandoned its water rights due to total nonuse for 40 years and use of less than 6,000 af/y for over 60 years.
“If you don’t use it, you lose it in the state of New Mexico,” Dugan told WiO, referring to the state’s Water Code, which declares that water must be put to beneficial use in order for rights to be preserved.
Intrepid maintains its water rights have not been abandoned or forfeited on the grounds that water flows at its diversion points – 31 miles above the Texas delivery point – were at times insufficient, and even when they weren’t, cyclical potash demand meant that available water could not be used. DuMars said the claims are further bolstered by the fact that Intrepid and its predecessors filed for and received multiple OSE extensions on several licenses between 1978 and 2017.
Furthermore, the company asserts beneficial use by having leased 19,823 af/y of licensed water rights to New Mexico’s Interstate Stream Commission (ISC) so the state could remain in compliance with the 1948 Pecos River Compact, a federal law ensuring annual delivery of certain water volumes to Texas.
The water rights adjudication case is scheduled to be heard in December 2020 by Judge James Wechsler. Dugan said that if the court were to affirm Intrepid’s claimed water rights and allow the company to pump that volume, compliance with the compact would be put at greater risk.
“New Mexico paid over $100 million to buy up water rights on the Pecos River to bring New Mexico in compliance. We were only out of compliance by approximately 10,000 af/y,” he explained. “You can see that 19,000 af/y would quickly put New Mexico back in breach of the compact. Also, at certain times and in certain years, it would likely dry up the Pecos River.”
As a senior water rights holder, Intrepid holds that it is not up to it to guarantee New Mexico meets its obligations to Texas during short years, but that junior rights holders will have to curtail their water use. The company has nevertheless offered to develop solutions with the ISC to avoid compact violations, DuMars noted.
“Intrepid believes that when the dust clears, it will be granted a substantial water right to which all others on the river will be required to adjust,” he said. “A stipulated settled approach would have been much better and still could be. However, the more the parties have to spend money on litigation, the less likely settlement becomes.”
OSE attorney Christopher Lindeen told WiO that he would not provide comments unless through the proper channels of the state agency. OSE acting public information officer Kristina Eckhart had not responded to multiple requests for comment by the time WiO went to press.