Significant amounts (> 36 million m3/day) of coalbed methane (CBM) are currently being extracted from coal beds in the Paleocene Fort Union Formation of the Powder River Basin of Wyoming and Montana. Information on processes that generate methane in these coalbed reservoirs is important for developing methods that will stimulate additional production. The chemical and isotopic compositions of gas and ground water from CBM wells throughout the basin reflect generation processes as well as those that affect water/rock interaction. Our study included analyses of water samples collected from 228 CBM wells. Major cations and anions were measured for all samples, δDH2O and δ18OH2O were measured for 199 of the samples, and δDCH4 of gas co-produced with water was measured for 100 of the samples. Results show that (1) water from Fort Union Formation coal beds is exclusively Na–HCO3-type water with low dissolved SO4 content (median < 1 mg/L) and little or no dissolved oxygen (< 0.15 mg/L), whereas shallow groundwater (depth generally < 120 m) is a mixed Ca–Mg–Na–SO4–HCO3 type; (2) water/rock interactions, such as cation exchange on clay minerals and precipitation/dissolution of CaCO3 and SO4 minerals, account for the accumulation of dissolved Na and depletion of Ca and Mg; (3) bacterially-mediated oxidation–reduction reactions account for high HCO3 (270–3310 mg/L) and low SO4 (median < 0.15 mg/L) values; (4) fractionation between δDCH4 (− 283 to − 328 per mil) and δDH2O (− 121 to − 167 per mil) indicates that the production of methane is primarily by biogenic CO2 reduction; and (5) values of δDH2O and δ18OH2O (− 16 to − 22 per mil) have a wide range of values and plot near or above the global meteoric water line, indicating that the original meteoric water has been influenced by methanogenesis and by being mixed with surface and shallow groundwater.