Texas dominates American energy production. The Permian Basin alone accounts for roughly half of all U.S. oil production and generates more produced water than all other U.S. shale plays combined.
Yet while Texas levies a severance tax on the extraction of oil and gas — 4.6 percent on crude oil and 7.5 percent on natural gas — the state imposes no comparable tax on the injection of billions of gallons of produced water into Texas disposal wells. A tax on produced water disposal, with a higher rate for water originating outside the state, would not only generate revenue, but also preserve and protect Texas’ shrinking disposal capacity while encouraging efforts to recycle and beneficially reuse this massive industrial byproduct.
Water, Water Everywhere
The numbers are staggering — Texas is drowning. Produced water is the largest waste-management stream associated with oil and gas production. The Permian Basin alone generates between 20 million and 25 million barrels of produced water daily. It is generally said that for every barrel of oil extracted in the Permian, operators bring to the surface three to five barrels of produced water — a toxic brew with high concentrations of salt, heavy metals and other impurities. Disposition of this inevitable byproduct has traditionally involved injection into underground caverns through so-called disposal wells.
Predictions vary, but B3 Insight, a data analytics firm specializing in produced water trends, has estimated that Permian Basin produced water volumes will increase 39 percent by 2035. Operators are discovering that subsurface pore space — once considered virtually unlimited — is, in fact, a finite geological resource that must be managed carefully.
The Dallas Federal Reserve Bank conducts a quarterly survey of oil and gas firms within its Eleventh District, which includes Texas, southern New Mexico and northern Louisiana. Seventy-four percent of respondents to the survey in the second quarter of 2025 anticipated that produced water management would constrain drilling and completion activities over the following five years with 32 percent expecting it to constitute a significant constraint.
That concern was alleviated for some respondents by the second quarter of 2026 — which may reflect recent Railroad Commission disposal restrictions, discussed below — but 58 percent of respondents still expected produced water management to be a slight or significant constraint to activities over the following 12 months in the Permian Basin, compared to 41 percent for drilling activities outside the Permian.
New Mexico’s Regulatory Choices
The pressure on Texas disposal wells is exacerbated by a curious cross-border dynamic. In 2016, the New Mexico Oil Conservation Division enacted a rule prohibiting new shallow saltwater disposal wells in most of that part of the state’s Delaware Basin, specifically precluding new such wells in the Delaware Mountain Group formation — the primary subsurface disposal zone in the basin. The basis for New Mexico’s rule was research showing that shallow produced water injection interfered with producing oil wells in proximal formations. In 2024, the state’s regulators canceled 75 saltwater disposal wells near the border with Texas, which would have accommodated injections of up to 2.3 million barrels of water per day, because of the discovery of previously undetected seismic activity in the area.
The consequence of the cross-border regulatory disparity has been predictable. Back in 2023, one industry observer estimated 1.8 million barrels of produced water originating in New Mexico were sent daily across the state line to Texas for disposal. That number continues to grow. Water moves freely across the border, untaxed, loosely regulated and inconspicuously reported. Without this outlet for wastewater, some New Mexico Permian oil production would grind to a halt.
The result is a fundamental inequity. The state of New Mexico continues to receive tax revenue from hydrocarbon development made possible only by Texas’ willingness to absorb its produced water. New Mexico operators reap the benefits of lower-pressured shallow reservoirs and comparably lower seismic risk by shipping their waste to Texas, while Texas operators bear the consequences of shrinking disposal capacity, rising formation pressures and increasing regulatory restrictions.
Seismicity and Capacity Constraints
The consequences of uncontrolled disposal are becoming impossible to ignore. An increase in the magnitude and frequency of earthquakes with causal links to injections has prompted regulatory action on both sides of the border.
The recent 5.4 magnitude earthquake in the Delaware Basin, the third-largest seismic event recorded in Texas, triggered new curtailments and restrictions on disposal operations. The Oil and Gas Division of the Railroad Commission, noting that “the continued demand for underground saltwater disposal capacity in the Permian Basin and the physical limitations of the disposal reservoirs,” has implemented new guidelines that limit maximum injection pressure at the surface and restrict how much water can be injected based on reservoir pressure.
These new regulations, which took effect June 1, 2025, reflect the reality that disposal capacity in the Permian Basin is finite. Shallow formation pressure in the Delaware sub-basin has increased three times faster since 2018 than in the Midland sub-basin, and gathering and disposal costs for produced water in parts of the Delaware Basin are expected to rise 20 to 30 percent over the next few years, according to a Reuters report. Disposal curtailments disproportionately impact Texas operators, who must compete for space with New Mexico’s produced water.
A Proven Model: Ohio’s Nickel-a-Barrel Fee
Texas is not without a model for how to address this problem. Ohio levies a per-barrel tax on brine disposal that distinguishes between in-state and out-of-state sources. Operators injecting brine produced within the same or an adjoining regulatory district pay five cents per barrel, while out-of-district or out-of-state brine faces a 20 cents per barrel fee. This differential rate structure protects Ohio’s disposal capacity while generating revenue from interstate waste.
Texas might consider a similar approach. That same industry observer has estimated that a 20-cent-per-barrel tax on interstate produced water in the Delaware Basin could generate more than $140 million annually in tax revenue for the state, as reported in the Morning News, with further potential for revenue from interstate water transport and disposal in other parts of the state, such as from Louisiana to East Texas in the Haynesville-Bossier play.
Making it Rain — Recycling and Beneficial Reuse
Recycling for hydraulic fracturing has already expanded meaningfully across the Permian. As of mid-2024, the results of a survey indicated that 66 percent and 62 percent, respectively, of produced water in the Delaware and Midland sub-Basins was being recycled and reused for hydraulic fracturing, according to the Texas Produced Water Consortium Report to the Texas Legislature. The percentages are expected to increase — reducing freshwater demand in one of the most water-stressed regions in the United States.
As disposal costs rise — whether through market forces or regulatory intervention — operators will have greater incentive to invest in pipeline projects, treatment technologies and produced water recycling infrastructure. The Texas Produced Water Consortium estimates that two to four billion barrels of produced water could eventually be recycled for beneficial uses outside the oilfield as treatment costs decline, including industrial cooling, irrigation, and potentially discharge into waterways if regulators and the public are convinced the water is safe.
The Untapped Potential of Critical Minerals
Produced water may contain more than just waste. Researchers are exploring whether it can yield valuable critical minerals, particularly lithium. The U.S. Geological Survey Produced Water Database has identified 40 of the 50 critical minerals on the agency’s critical-mineral list in produced water samples and estimates that large-scale recovery potential exists in some basins. The Department of Energy’s National Energy Technology Laboratory has similarly emphasized produced water as a potential unconventional resource for critical minerals and materials.
Extraction of lithium and other rare earth elements from produced water remains in its infancy, but a disposal tax that encourages treatment rather than injection could increase the flow of investment into these technologies and create additional economic value from what is currently flushed down the drain.
Conclusion
A Texas state tax on produced water disposal — with a higher rate for out-of-state water — is worth considering. Such a tax would generate substantial revenue for the state, put Texas operators at an advantage in competing for finite disposal capacity and create economic incentives for recycling and beneficial reuse. Texas has the severance tax infrastructure in place; extending that framework to produced water disposal is a natural and necessary next step.
Ray Guy is a partner at FBT Gibbons LLP and co-head of the firm’s Oil, Gas & Minerals Team. He gratefully acknowledges the editorial assistance of his partner and co-head of the Oil, Gas & Minerals Team, Kevin Colosimo.
