The state of South Dakota has entered into a precedent-setting, $1.4 billion deal to sell Missouri River water to a private energy corporation to move Wyoming coal slurry 1,300 miles south to Gulf of Mexico ports.

South Dakota agreed to the sale at a time when it is suffering from the worst drought since the 1930s and also wrestling with severe financial stress.

The deal, which is being opposed by several downstream states, underscores a growing phenomenon in the Midwest and West in which the region's sparse water is becoming more valuable for the extraction and use of minerals than for farming and more traditional Western endeavors.

The amount of water sold by South Dakota is relatively small--16 billion gallons a year for the next 50 years. South Dakota Gov. William Janklow argues it amounts to just one for every 4,850 gallons of Missouri River water flowing out of his state. South Dakota plans to use its unexpected financial bonanza to set up a water-development fund to finance irrigation projects in the drought-plagued state.

But Nebraska Gov. Charles Thone, who is threatening to sue to block the sale, says the plan sets a "dangerous precedent" that could lead to much larger water transfers to energy companies, imperiling navigation, waste-water treatment and irrigation uses of Missouri River water.

The proposed sale came after secret negotiations late last summer between Janklow and a San Francisco-based coal-slurry company, Energy Transportation Systems, Inc. It was approved overwhelmingly by the South Dakota legislature late last month. The San Francisco firm has until next April to make a decision to go ahead with the project, which could cost a total of $4 billion.

The deal involves a precedent-setting transfer of water from one river basin to another for industrial uses.

Under the agreement, South Dakota would provide the San Francisco firm, ETSI, with 50,000 acre feet of water a year for the next 50 years from the Missouri's Oahe Reservoir near Pierre, S.D. The cost would average about $180 an acre foot, far more than farmers are able to pay for water.

ETSI, a consortium of industrial heavyweights including Atlantic Richfield and Bechtel, would move the water by pipeline to coal fields near Gillette, Wyo. At Gillette, one of the West's new energy boom towns, the water would be mixed with powdered coal and moved as slurry through 1,300 miles of pipeline to power plants and barge loading docks in Arkansas and Louisiana.

In effect, the water would be used as a means of transporting "liquid coal" to the gulf area. It is only one of a number of ways that water is becoming more valuable for mineral extraction and power production than it is for farming in the Midwest and West.

Janklow argues that the deal would draw down the 100-foot-deep Oahe Reservoir by less than an inch.

In the contract with ETSI, South Dakota agreed to issue up to $350 million in revenue bonds to help the San Francisco consortium finance the pipeline from South Dakota to Wyoming. ETSI would use South Dakota's tax-free bond status to save unspecified millions of dollars in finance charges, project supporters said.

Part of the agreement also prohibits ETSI from using the Madison Aquifer (natural underground water reservoir) under western South Dakota and eastern Wyoming as its primary water source for the slurry. ETSI has a Wyoming permit to pump from the aquifer, which Janklow feared would have drained water supplies of ranchers and communities in that part of the state.

South Dakota found itself in something of a Catch-22 situation on ETSI's plans to build the coal-slurry pipeline. The state had no control over the company's plans to use a Wyoming permit to draw water from the aquifer. Other states in the region apparently have no control over South Dakota's plans to tap the Missouri. There is no interstate compact governing the Missouri.

Officials in downstream states, however, were far more worried about the long-term meaning to the Missouri than the local threat to the underground aquifer.

"The thing we are concerned about is future withdrawals," said Jack Hart, Nebraska's executive co-ordinator for natural resources. "Already there have been proposals that would take millions of acres of water out of the Oahe for oil-shale production in Colorado."

Hart said the price that energy companies are willing to pay for water is so tempting it could overwhelm agricultural uses. In Utah, when the Intermountain Power Project was begun, ranchers sold their water rights to the power companies for more than their land was worth and stopped ranching.

"It's agriculture versus minerals and it has us immensely bothered," Hart said.

Hart said the price paid by the slurry firm was far more than farmers could afford.

"If farmers had to pay that price it would add $1.70 a bushel to corn that's worth $2.30," he said. "That's what we're up against. We are facing not having water for farming or finding a new way of extracting and using minerals, which seems like wishful thinking. It's a tremendous problem and we don't see a solution to it right now."

Janklow said water prices always would be lower for agricultural use than for energy development because "one involves the life blood of South Dakota and the other doesn't."

The debate over moving coal through slurry pipelines began almost 10 years ago. The proposals have been fought tenaciously by Western railroads, who now move the bulk of the coal from the huge new fields in Wyoming and Montana.

Although Nebraska and other downstream states are not optimistic about blocking the South Dakota deal in the courts, the slurry-pipeline consortium still faces some major hurdles in the plan to move "liquid coal" south to the gulf.

So far, the railroads have refused to grant the pipeline company access through their land-grant holdings polka-dotted throughout the West.

ETSI has asked states between Wyoming and the gulf to grant it the right of eminent domain to pass through the railroad lands. Some, such as Nebraska, have balked. The company has indicated that it might build the pipeline around Nebraska if the state refuses to change its mind.

It also is unclear what will happen to the Missouri River water once it reaches the southern end of the pipeline and the coal is removed.

The water will not be fit for human consumption, even after it is cleaned up. ETSI reportedly is seeking industrial or irrigation users for the water. Otherwise, the company may need government permits to dump the water into existing waterways.