As oil field technologies advance, the law sometimes struggles to catch up.
Such is the case that came before the Texas Supreme Court on Tuesday involving ownership of “produced water.” New treatment methods are making the hazardous by-product into a potentially valuable resource that could lessen the demand on fresh water for fracking and other uses.
Powerful interests in the oil and gas and agriculture industries have lined up on both sides of the question about whether the surface estate holder or drilling operator owns the treated water. The outcome could broadly affect property rights and state regulation of 150,000 oil and gas leases.
The case involves four mineral leases on about 37,000 acres in the Permian’s Delaware Basin. COG Operating executed the leases from 2005 to 2014 with surface owners on Collier and Balmorhea tracts. Years later, the surface owners executed Produced Water Lease Agreements with Cactus Water Services.
COG sued Cactus, saying it owned the produced water from its oil and gas operations, and Cactus counterclaimed. The Reeves County trial court granted summary judgment in COG’s favor, determining that the produced water was part of COG’s product stream.
The Eighth Court of Appeals affirmed, concluding that produced water is waste as a matter of law.
In its petition for review, Cactus cited decades of Texas Supreme Court decisions saying that, unless expressly conveyed, subsurface water belongs to the surface estate — no matter its depth or mineral content. “If left on the books, the Eighth Court’s new ownership rule will strip away surface owners’ constitutionally protected property rights in subsurface water and cast a dark cloud over this Court’s landmark decisions in Edwards Aquifer Authority v. Day, Sun Oil Co. v. Whitaker, and Robinson v. Robbins Petroleum Corp,” said the petition filed by Dana Livingston, who presented oral arguments for Cactus.
COG, represented by Macey Reasoner Stokes, said in a response brief that Cactus is “seeking a far-fetched interpretation of standard oil and gas leases with the express purpose of creating a new market for itself” in the nascent industry of recycling oil-and-gas waste. The brief noted that surface owners are not regulated by the Railroad Commission and that without the ability to safely dispose of its oil and gas waste in a proper fashion, COG would be forced to shut its wells.
“No one disputes that groundwater typically belongs to the surface estate, but the hazardous substances Cactus claims to own have never been mistaken for groundwater. Instead, they are the liquid by-products left over after oil and gas are separated from the product stream at post-production surface facilities,” Stokes said in her brief.
During oral arguments Tuesday, the justices peppered both lawyers with questions about the nature of the water at issue.
Livingston said the focus should be on the substance when it exists down in the ground.
“Oil and water don’t mix. Who owns it when it’s down there. Well, it’s owned by the landowner,” said Livingston, a principal in Cokinos Young.
Stokes, a Baker Botts partner, disagreed.
“This case is about oil and gas, not water,” she said. “For over 100 years, the parties to Texas oil and gas leases have consistently understood that … to mean the wet black stuff that comes out of the ground.”
Pressed by Justice Brett Busby, Stokes said that if any royalty is owed on produced water, it would owed be to the mineral owner.
Justice Rebeca Aizpuru Huddle asked about the economics of produced water going forward. Stokes said COG has spent $20 million treating the water so that it could be safely injected into disposal wells but acknowledged that advances in treatment could eventually make it safe for agricultural use.
“Natural gas — many decades ago people thought of that as a waste. They burned it off — flared it,” said Stokes. “Once it became — with technological advances — valuable, mineral lessors started negotiating for a separate royalty on gas.”
The Texas Independent Produced Water Association filed an amicus brief supporting COG. Isaac Griesbaum of The Woodlands said if the Supreme Court reverses the Eighth Court of Appeals, the “resulting situation would allow landowners to engage in rent-seeking by demanding payment for a waste byproduct without contributing to making that product usable — creating a new cost on top of managing and processing the waste without any corresponding value.”
COG also received amicus support from the Texas Oil & Gas Association, Permian Basin Petroleum Association and Texas Civil Justice League.
Cactus received support from the Texas Farm Bureau, the Texas and Southwestern Cattle Raisers Association, Texas Land & Mineral Owners Association and Standard Lithium.
Writing for the cattlemen’s group, James D. Bradbury and Courtney Cox Smith said the ownership of groundwater has never been divided in Texas.
“The Court of Appeals’ decision in this case now departs from long-standing precedent protecting foundational rights of Texas landowners to ownership of water underlying their land,” they wrote. “Further, the Court of Appeals ignores the technologies that have rendered produced water reusable and a marketable commodity and the inherent value of these alternative water sources in a world where water scarcity is increasing. As of December 31, 2024, more than sixty percent of the state is in some type of drought, with approximately twenty percent of the state experiencing severe or exceptional drought.”