1. PRODUCED WATER FROM COALBED METHANE PRODUCTION: WATER LAW ISSUES AND DEVELOPMENTS Zach C. Miller Davis Graham & Stubbs LLP Denver, Colorado December 14, 2007

2. TWO PENDING CBM WATER LAW CASES COLORADO – VANCE v. SIMPSON Ruling Against State Engineer – July 2007 Supreme Court Appeal Pending WYOMING – WEST v. TYRELL Filed June 2007 Early Stages

8. SEO/DWR CBM STREAM DEPLETION STUDIES San Juan Basin –Final Report – May 2006 –Est. Depletions: 56 AF O/P; 150 AF Total Raton Basin –Draft Report – Nov. 2007 Piceance Basin – Pending On SEO Website

15. STATE ENGINEERS OFFICE/DWR REGULATES: Permitting of Water Wells Administration of Tributary Water Rights in Priority Approval of Substitute Supply Plans Prevention of Material Injury to Water Rights from Non-Water Right Water Diversions Conferral in Water Court Matters

17. ROLE OF WATER COURT Designated District Court in River Basin Exclusive Jurisdiction Over Water Matters Decree New or Changed Water Rights Approve Augmentation Plans Prevent Material Injury to Water Rights

18. COLORADO WATER LAW PRIMER Prior Appropriation Doctrine: First in Time, First in Right Beneficial Use = Appropriation = Water Right Administered in Priority When Shortages SEO Authority to Issue Well Permits SEO Authority to Prevent Material Injury Augmentation and Substitute Supply Plans Water Court Approval of New or Changed Rights and Augmentation Plans

19. SPECIAL STATUS OF NONTRIBUTARY GROUND WATER Not Deplete Natural Stream At Annual Rate > 0.1% of Annual Rate of Withdrawal in 100 Years Presumed Tributary Unless Rebutted Governed Solely By Statute Not Subject to Prior Appropriation Doctrine Generally Allocated by Overlying Land Ownership Generally Need SEO Well Permit Special Mineral Extraction Statute: Not Need SEO Permit Unless Water Will be Beneficially Used (37-90-137(7)

23. VANCE v. SIMPSON CASE Dec. Jdmt. Action in Div. 7 Water Court Filed December 2005 Two Landowners vs. State Engineer Intervenor: BP America Production Co.

24. VANCE PLAINTIFFS CLAIMS CBM Produced Water Withdrawal = Beneficial Use Ergo, CBM Well = Water Well Requiring SEO Permit Water Court Decree and Aug. Plans Required SEO Must Curtail Pumping Until Permits Issued

25. VANCE CASE COVERAGE AND EXCLUSIONS Only CBM Wells in Water Division 7 (San Juan River Basin) CBM Wells Within So. Ute Reservation With Any Tribal Interest Are Excluded/Not Covered

26. WATER COURT SJ RULING – 7/07 COGCC Not Have Exclusive Jurisdiction/Authority CBM Produced Water Withdrawal = Beneficial Use SEO Required to Issue Water Well Permits Aug. or Supply Plans Required Where/When Out of Priority Presume Produced Water Is Tributary Unless Proven Nontributary No Deference to SEO Guidance Documents Granted Relief Requested In Complaint Silent Re Nontrib and Tribal Wells

27. POST-DECISION STATUS Direct Supreme Court Appeal by State & BP Ruling Stayed by WC Pending Appeal WC Declined to Clarify Ruling, Except Costs Cost Claim Pending Appeal Not Briefed Designation of Record

28. PRESENT EFFECT OF WC RULING Ruling Stayed Pending Supreme Court Decision Not Cover/Address: –CBM Wells with So. Ute Interests –CBM Wells Outside San Juan Basin –Non-CBM Oil and Gas Wells Precedential Effect or Supreme Court Ruling? Possible Legislative Fix? –Cf. Gravel Pit Case/Statute To Be Continued!

29. WEST v. TYRELL LAWSUIT - WYOMING Dec. Jdmt Action Filed June 2007 2 Landowners v. State Engineer Intervenors (Pending): Devon & Pennaco Hearing on Disputed Intervention Flip-Side of Vance Case

30. WYOMING SEO POLICY/PRACTICE – 4/04 Consider CBM Produced Water Withdrawal a Beneficial Use and Require Water Permit Water Permits Generally Issued Without Aug. Plans and No Court Involvement Simpler/Quicker Permit Processing Than Colorado

31. WEST PLAINTIFFS CLAIMS WY Constitution: No Appropriation Shall Be Denied, Except When Such Denial Is Demanded By The Public Interest SEO Fails to Evaluate Public Interest SEO Must Require No-Injury Proof SEO Must Provide for Public Comment and Hearing SEO Must Pass Rules for CBM Water Permits

32. OTHER WATER-RELATED DEVELOPMENTS Proposed New COGCC Rules –Water Monitoring and Protection Wyoming CBM Task Force –Drainage Ditch Legislation EPA CBM ELG-Setting Project –Voluntary/Mandatory Surveys –Critical to Provide Input Colorado Water Legislation? Keep a Close Watch On!