Its for a very easy quest. Take it to East Ronafuare and go north till you get to the end of the river (river runs under a hill, so you will have to go around the hill.) When you get to the end, near a bridge you will target an object in the river called "Cheval River". Trade the waterskin to it. Then take the waterskin back to the npc you got it from and trade it to him. I forget what you get for it.