Municipal Subdistrict v. OXY, USA, INC., 98SA475.

• Decision Date: 13 December 1999
• Docket Number: No. 98SA475.,98SA475.
• Citation: 990 P.2d 701
• Parties: MUNICIPAL SUBDISTRICT, NORTHERN COLORADO WATER CONSERVANCY DISTRICT, Objector-Appellant/Cross-Appellee, v. OXY USA, INC., Applicant-Appellee/Cross-Appellant, and Orlyn G. Bell, Division Engineer, Water Division 5, Appellee pursuant to C.A.R. 1(e).
• Court: Colorado Supreme Court

990 P.2d 701

MUNICIPAL SUBDISTRICT, NORTHERN COLORADO WATER CONSERVANCY DISTRICT, Objector-Appellant/Cross-Appellee, v. OXY USA, INC., Applicant-Appellee/Cross-Appellant, and Orlyn G. Bell, Division Engineer, Water Division 5, Appellee pursuant to C.A.R. 1(e).

No. 98SA475.

Supreme Court of Colorado, En Banc.

December 13, 1999.

Trout & Raley, P.C., Bennett W. Raley, Bart L. Rickenbaugh, Denver, Colorado Attorneys for Objector-Appellant/Cross-Appellee.

Carlson, Hammond & Paddock, L.L.C., Peter C. Fleming, William A. Paddock, Emy Pollock, Denver, Colorado Attorneys for Applicant-Appellee/Cross-Appellant.

Ken Salazar, Attorney General, Barbara McDonnell, Chief Deputy Attorney General, Michael E. McClachlan, Solicitor General, Patricia S. Bangert, Director of Legal Policy, Wendy C. Weiss, First Assistant Attorney General, Carol D. Angel, Senior Assistant Attorney General, Natural Resources Section, Denver, Colorado Attorneys for Appellee Orlyn G. Bell.

Fairfield and Woods, P.C., Stephen H. Leonhardt, David M. Gillilan, Denver, Colorado, Attorneys for Amicus Curiae Southeastern Colorado Water Conservancy District.

David C. Hallford, Jill C. Harris, Glenwood Springs, Colorado, Leavenworth & Tester, P.C., Loyal E. Leavenworth, Glenwood Springs, Colorado, Attorneys for Amicus Curiae Colorado River Water Conservation District.

Moses, Wittemyer, Harrison and Woodruff, P.C., James R. Montgomery, Kevin J. Kinnear, Boulder, Colorado, Attorneys for Amicus Curiae Union Oil Company of California.

Williams, Turner & Holmes, P.C., Anthony W. Williams, Mark A. Hermundstad, Grand Junction, Colorado, Attorneys for Amicus Curiae Shell Frontier Oil & Gas Inc. and Getty Oil Exploration Inc.

Fiedlob, Sanderson, Raskin, Paulson & Tourtillott, LLC, Brian M. Nazarenus, Denver, Colorado, Attorneys for Amicus Curiae Public Service Co. of Colorado and Climax Molybdenum Company.

Balcomb & Green, P.C., Scott Balcomb, David Sandoval, Jefferson J. Cheney, Glenwood Springs, Colorado, Attorneys for Amicus Curiae Mobil Oil Corporation.

Porzak Browning & Johnson, LLP, Glenn E. Porzak, Steven J. Bushong, Heidi C. Fletemeyer Boulder, Colorado, Attorneys for Amicus Curiae Exxon Corporation.

Dufford & Brown, P.C., Jack F. Ross Denver, Colorado, Attorneys for Amicus Curiae Chevron Shale Oil Company.

Justice KOURLIS delivered the Opinion of the Court.

This case involves the hexennial application of OXY U.S.A., Inc. (OXY) to maintain conditional water rights that it holds in Garfield County, Colorado. The water court concluded that OXY had demonstrated reasonable diligence in its efforts to complete the appropriation, and granted the conditional decree. We now hold that the evidence supported the water court's findings and conclusions and affirm accordingly. The water court was entitled to take the economics of the shale oil industry into account, and was also correct in requiring OXY to demonstrate that it "can and will" complete the project under more favorable economic conditions.

I.

OXY owns more than 10,000 acres of land in Garfield County that contain significant oil shale reserves. The process of extracting the shale requires significant water resources, and OXY holds a conditional water decree for its future shale operations. OXY obtained the conditional water rights from its predecessor, Cities Service Company, who initiated the rights in 1951 and 1966, and obtained a decree in 1970.

OXY filed a hexennial application in 1995 to maintain its conditional water rights, pursuant to section 37-92-301(4)(a), 10 C.R.S. (1999). The Municipal Subdistrict, Northern Colorado Water Conservancy District (the Subdistrict) opposed the application, claiming that OXY failed to develop its conditional rights diligently, and therefore, effectively abandoned them.

The evidence presented to the water court reflects that OXY currently has one employee responsible for its oil shale development project, and the project's expenses are budgeted as part of the overhead for another operating group within OXY. During the six-year diligence period, OXY spent a total of $5,052,235 on the project. These expenses included drilling four natural gas wells that provided data regarding the oil shale reserves as well as income to offset the cost of maintaining the oil shale assets.¹

OXY's other activities during the diligence period included: 1) completing technological and economic feasibility studies for the property; 2) attempting to solicit financial partners for the project; 3) participating in the Colorado River Project on Threatened and Endangered Species, the Colorado River Simulation Model Project (CORSIM), the Rocky Mountain Oil and Gas Association, Oil Shale Committee, and the Colorado Water Congress' Colorado River Project on Water Quality Standards; and 4) gathering data regarding water supply. OXY incurred additional expenses for salaries, engineering fees, legal fees, and litigation costs to protect its water rights.

OXY admitted before the water court that it currently cannot extract the oil shale because low oil prices make the project economically infeasible. Until oil prices rise or the government subsidizes the project, OXY is unlikely to extract any shale.

The water court held that under section 37-92-301(4)(c), 10 C.R.S. (1999), OXY met the "can and will" standard because OXY possessed the technology to make the project feasible and because the project would proceed as soon as oil prices rise. The water court found that despite the adverse economic conditions, OXY's activities as a whole demonstrated diligent effort to complete the project in a reasonably expedient and efficient manner.

The Subdistrict appealed the water court's ruling to this court pursuant to Colorado Constitution, article VI, section 2(2), and section 13-4-102(1)(d), 5 C.R.S. (1999). The Subdistrict challenged the water court's findings of reasonable diligence as well as a ruling on discovery sanctions against OXY.

II.

A conditional water right gives the holder the ability to perfect a water right in the future as long as the holder diligently develops the right to eventual maturity. See § 37-92-103(6), 10 C.R.S. (1999). To maintain a conditional water right, the holder must file an application for a finding of reasonable diligence every six years. See § 37-92-301(4)(a)(1). Once the conditional right matures and is completed by actual application of the water to beneficial use, the priority of the right relates back to the date of the decree. See § 37-92-305(1), 10 C.R.S. (1999). The legislature has not provided a time frame during which the conditional right must mature.

The Subdistrict claims that OXY's activities over the last six years do not rise to the level of diligence necessary to maintain the conditional water rights, and thus, OXY effectively abandoned its rights. The water judge disagreed, holding that OXY sufficiently demonstrated that it was pursuing completion of its conditional water rights and that the test for demonstrating reasonable diligence was met.

The water court's conclusion presents issues of both law and fact. The water court's interpretation of Colorado statutes and case law concerning conditional rights is, of course, subject to our de novo review. See City of Thornton v. Bijou Irrigation Co., 926 P.2d 1, 40 (Colo.1996)

. As to the factual issues, a water court "must make an ad hoc factual inquiry into many factors when it determines whether an appropriation has been developed with reasonable diligence." Municipal Subdist., N. Colo. Water Conservancy Dist. v. Chevron Shale Oil Co., 986 P.2d 918, 922 (Colo.1999) (hereinafter Chevron ). The findings arising out of this inquiry are entitled to deference and we will not disturb them unless the evidence in the record is wholly insufficient to support the water court's determinations. See Bijou Irrigation, 926 P.2d at 40.

A. SHOWING OF DILIGENCE

The standard for demonstrating diligence in development of a conditional water right is "the steady application of effort to complete the appropriation in a reasonably expedient and efficient manner under all the facts and circumstances." § 37-92-301(4)(b), 10 C.R.S. (1999). As the statute indicates, the determination of whether reasonable diligence has been exercised by an applicant is a fact-based decision requiring the water court to consider all relevant evidence. See Public Serv. Co. v. Blue River Irrigation Co., 829 P.2d 1276, 1277 (Colo.1992)

. These factors include "the size and complexity of the project, the extent of the construction season, the availability of material, labor, and equipment, the economic ability of the claimant, and the intervention of outside delaying factors." Trans-County Water, Inc. v. Central Colo. Water Conservancy Dist., 727 P.2d 60, 64 (Colo.1986).

Activities of the applicant must be project-specific. See Colorado River Water Conservation Dist. v. City & County of Denver, 640 P.2d 1139, 1142 (Colo.1982)

(finding that general activities, such as litigation to protect water rights, standing alone, do not amount to reasonable diligence). Evidence of project-specific work may include planning, design, financing, or construction efforts to develop the project. See id. However, "work on one feature of the project or system shall be considered in finding that reasonable diligence has been shown in the development of water rights for all features of the entire project or system." § 37-92-301(4)(b).

This court's recent decision in Chevron addresses many of the issues raised by the Subdistrict. In that case, the Subdistrict raised a similar challenge to Chevron's hexennial application for a conditional water right. We upheld the water court's finding that Chevron demonstrated due diligence because the record showed that the company invested resources in activities such as planning for diversion and pipeline facilities, planning for a dam, preparing environmental baseline studies, preparing a detailed master planning...