The implications of creating a water market in the Athabasca region of Northern Alberta are examined with the objective of creating a system which encourages efficient water usage by oil sands mining producers. An analysis is performed considering entry to the oil industry when there is no constraint on available water supply versus a situation where the available water supply is constrained. Vertically integrated incumbent oil firms can strategically increase their capacity investment in the downstream oil market to exercise market power in the upstream water market, resulting in entry deterrence when there is a constraint on the water supply. In the absence of a constraint on the water supply, we show that the market will be no more efficient than the current water allocation system.