Water grab in Kansas oil boom

HARPER COUNTY, Kan. (CNNMoney) -- In the farm country of southern Kansas, water is a precious commodity. And not just for farming -- for fracking.

In hydraulic fracturing, water is injected into the ground at a high pressure to help crack shale rock and bring oil to the surface. The industry says it takes as much as 2 million gallons of water to drill a single horizontal well in Kansas.

Most drillers use groundwater or surface water from ponds and rivers. But first they must receive permission from whoever has rights to it and get a permit. Water permits have soared to the highest level in 30 years.

At the same time, many of the Kansas oil boomtown counties are already under "drought watch," and last month was the second driest May on record.

"Water is a real concern in this county," said Carla Pence, a commissioner of Harper County, which is at the center of the action. "We don't have a lot of easily accessible water, so there is a concern of where that water is going to come from, how it's going to be used and what's going to happen to it."

Mining for water: To cash in on the demand, one company is turning the biggest lake in Harper County into a water source for oil companies.

Select Energy is excavating Anthony Lake so that it can hold more rainfall. It plans to then sell water from the lake to oil companies that need it for drilling. Select is investing $1.5 million in the project and will pay the city of Anthony 10 cents of every barrel of water it sells once its initial investment is recouped.

Meanwhile, water drilling companies are springing up to help meet the demand. Mitch Hall, who launched H2O Drilling this year, is about to start drilling his first well this month and already has a list of 35 customers waiting.

"We just went through the worst drought in a long, long time, so that definitely has everyone thinking about how critical water is," Hall said. "Guys who would not have spent the money to have a water well drilled in the past are willing to do it today."

Local farmers and landowners are also making money on the water grab. Farmers are digging their ponds deeper, praying for the next rainfall and then selling whatever water they have to oil companies, said Mike Lanie, Harper County's economic development director.

The oil companies keep their water rates confidential. But Lanie, who talks with local farmers and oil companies, said they typically pay about 20 cents per 42 gallons of water. That money can add up quickly when each drilling well requires millions of gallons of water to frack.

For now, oil companies are finding the water they need. But if a drought returns, they could run into trouble.

Matt Grubb, president of SandRidge Energy, said his firm gets water from wherever it can -- including ponds and creeks.

"If we run into a bad drought coupling with a really quick ramp-up in activity, yeah there's going to be a lot of competition for water, so that could slow down activity," said Grubb.

The water used for fracking amounts to less than 1% of the state's overall use. But water supplies are already so tight, it's difficult for farmers to ensure they have enough for irrigation.

The other problem: While water used for irrigation can be reused, water used in fracking cannot be recycled for other uses because it is mixed with chemicals, said Joe Spease, chairman of the hydraulic fracturing committee at the Sierra Club.

And after farmers suffered around $2 billion in crop damage from a drought last year, this is a very dangerous time to be taking any water out of the supply, he said.

In fact, water levels in the High Plains aquifer system, which supplies water for about 86% of the state's irrigation permits, have been declining for 14 straight years -- dropping more than two feet in the last year alone, according to the Kansas Geological Survey.

Water contamination concerns: Along with concerns of quantity, there are also worries about the quality of this increasingly valuable resource.

"People in Kansas need to understand that their local water supplies -- the wells and water sources they depend on for survival and for their farming operations -- are at risk," said Spease of the Sierra Club.

Ed Cross, president of the Kansas Independent Oil & Gas Association, said that more than 57,000 wells have been fracked in Kansas since 1947, and more than 1.2 million across the entire country, without a single "verified or documented case of harm to groundwater."

Spease said there have been several studies linking fracking in other states to water contamination, along with many anecdotal reports. But he said that it's difficult to track how widespread problems might be without stricter reporting requirements.

And in a place like Kansas, where water is already in such high demand, anything that could further reduce the supply is a huge concern.

"We can't afford to lose any water in this part of the country," said Spease.

--CNNMoney's Jordan Malter contributed to this report.