The Texas Supreme Court on Friday settled a first-of-its-kind dispute over ownership of “produced water,” ruling in favor of the drilling operator over the surface estate holder in a Reeves County case.
“We hold that a deed or lease using typical language to convey oil-and-gas rights, though not expressly addressing produced water, includes the substance as part of the conveyance whether the parties knew of its prospective value or not. That being so, if the surface owner actually wants to retain ownership of constituent water incidentally and necessarily produced with hydrocarbons, the reservation or exception from the mineral conveyance must be express and cannot be implied,” the court said in an opinion written by Justice John Devine.
Justice Evan Young did not participate in the 8-0 decision.
Powerful interests in the mineral and agriculture industries had lined up on both sides of the question that could broadly affect property rights and state regulation of 150,000 oil and gas leases.
The ruling could prompt some leases to be renegotiated to clearly delineate ownership of the oilfield byproduct that is becoming increasingly valuable as technologies increase its potential for recycling and reuse.
In a concurring opinion, Justice Brett Busby said he wrote separately to make clear what the court did not decide in its narrow ruling. Busby, who was joined by Justices Debra Lehrmann and James Sullivan, said landowners and the hydrocarbon lessee are free to strike a different deal on ownership of groundwater produced with and then separated from hydrocarbons.
Questions about whether the lessee would owe royalties on the produced groundwater it leases and, if not, how the parties should account for any profit or loss realized from beneficial reuse or disposal of water are likely to be before the court in future cases, Busby said.
COG is represented by Macey Reasoner Stokes, a Baker Botts partner. Cactus is represented by Dana Livingston, a Cokinos Young principal.
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.
In 2019 and 2020, 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 and a divided Eighth Court of Appeals affirmed, holding that produced water constitutes oil-and-gas waste that belongs to the mineral lessee, not groundwater that belongs to the surface estate.
According to Devine’s opinion, COG has drilled 72 horizontal wells and generated nearly 52 million barrels of produced water, managing disposal of the byproduct both independently and through third parties. From December 2018 to March 2021, COG paid nearly $21 million in disposal fees to a third-party contractor, the court said.
“But like most surface-estate owners, Cactus possesses no permits, no infrastructure, and no ability to handle, transport, or dispose of produced water,” Devine said.
The heavy use of water in the fracking fluid used to break up rock formations containing oil and gas has posed disposal problems. For years, much of it was injected into underground disposal wells, a practice believed to cause earthquakes.
Recent innovations are increasing the value of produced water, which if sufficiently treated to meet safety and environmental standards, can potentially be recycled and reused in water-starved West Texas.
“Courts cannot employ a backward-looking construction of the conveyances that is informed by new technologies offering the potential for recycling and reuse that were not within the parties’ contemplation at the time of the conveyance. Because the court of appeals correctly concluded that the right to produced water was included in the conveyances to the hydrocarbon lessee, we affirm the judgment,” Devine said.
The Legislature this year enacted a law to encourage the recycling of produced water as an alternative to disposal via injection wells. House Bill 49, which goes into effect Sept. 1, expands liability protections for produced water treatment facilities to include oil and gas producers, landowners, and any third party that conveys produced water from a producer to a treatment facility.
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. Livingston warned that leaving the Eighth Court’s ruling in place would strip away surface owners’ constitutionally protected property rights and cast a dark cloud over several landmark decisions.
Devine addressed those arguments in his opinion.
“Cactus is correct in what it says about our groundwater cases, but that precedent is simply inapplicable to the question before us: whether incidentally produced liquid waste was included in the hydrocarbon conveyances. Edwards Aquifer, Robinson, and Sun Oil do not address waste byproducts of oil-and-gas production. Each case focuses on ownership of groundwater in situ or extracted through water wells for use as water,” he said.
“While produced water contains molecules of water, both from injected fluids and subsurface formations, the solution itself is waste — a horse of an entirely different color,” Devine said.
“Unlike water, produced water is subject to laws distinctly focused on oil-and-gas production and environmental safety concerns. Water is something that must be protected from oil-and-gas waste; the two are not interchangeable.”
“Although industry methods are evolving to better manage waste byproducts, that does not change the original scope of the conveyance, which must be interpreted as of the transfer of rights, not through a modern lens,” the opinion states.
The case number is 23-0676.