Go to the Bar area and talk to the bartender. Exit out to the World Map.
Enter Gato Grottoes and go to the Dungeons in the western section of the map. Enter the first door on the Left and continue through the dungeons until you find a room with a bunch of barrels and some nuns. Talk to the nuns to trigger the event and leave the room.
Now you get a chance to beat the snot out of Niccolo. Wee Hoo!
Enter Geo and talk to the bartender again.
Enter Lumina and talk to the bartender in the western section.
Enter the Duma Desert and work your way through the areas until you find the spring.
Watch the barrel fill up with water and you are done with this Event.
Upon Completion: Return home, talk to Lil' Cactus, go downstairs (watch him write the Event on the leaf), and go back upstairs to save your game before continuing.