The Texas Supreme Court yesterday granted Coyote Lake Ranch’s petition to review the Amarillo Court of Appeals’ opinion holding that the accommodation doctrine does not apply to severed groundwater. View my previous post on the case here.
The Atlantic Council, a Washington-based think tank, has published a draft white paper on the exploration industry’s use of water in Texas. The draft paper, “Sustainable Water Management in the Texas Oil and Gas Industry,” was written by John Tintera, of the Austin firm Sebree & Tintera. Tintera, formerly executive director of the Texas Railroad Commission, is now president of the Texas Water Recycling Association. The draft paper can be viewed here: DID264_1_073014.pdf. The Atlantic Council also has a white paper, “Produced Water: Asset or Waste?“, on its website.
Last week, the Amarillo Court of Appeals issued its opinion inn City of Lubbock v. Coyote Lake Ranch, LLC, No. 07-14-00006-CV, holding that the accommodation doctrine did not apply to restrict the City’s use of Coyote’s land to develop the City’s groundwater under the land.
In 1953, the City of Lubbock bought the rights to groundwater under the land now owned by Coyote Lake Ranch. In that deed, the City acquired all groundwater rights, and “the full and exclusive rights of ingress and egress in, over and on said lands so that the Grantee of said water rights may at any time and location drill water wells and test wells on said lands for the purpose of investigating, exploring, producing, and getting access to percolating and underground water.” The deed granted the right to lay water lines, build reservoirs, booster stations, houses for employees, and roads, “together with the rights to use all that part of said lands necessary or incidental to the taking of percolating and underground water and the production, treating and transmission of water therefrom and delivery of said water to the water system of the City of Lubbock only.”
In 2012, the City proposed a well field plan for the property and began testing and development under that plan. Coyote sued, asking for a temporary injunction to halt the City’s activity. Coyote claimed that the City failed to accommodate Coyote’s existing uses of the property (the opinion does not say what those uses are), and that the City could use alternatives that would lessen damage to Coyote’s use of the land. The trial court granted the temporary injunction, holding that Coyote was likely to be able to show at trial that the City’s plan could be “accomplished through reasonable alternative means that do not unreasonably interfere with [Coyote’s] current uses.” The City appealed from that order.
In the Court of Appeals, the City made two arguments: first, it argued that the accommodation doctrine does not apply to the relationship between the owner of the surface and the owner of groundwater. Second, it argued that the express language in the water rights deed would prevail over general accommodation doctrine principles.
The Court of Appeals reversed, agreeing with the City that the accommodation doctrine does not apply to limit the rights of holders of groundwater rights. The Court said that the Texas Supreme Court has not extended the accommodation doctrine to groundwater, and that “changes in the law should be left to the Texas Supreme Court or the Texas Legislature.”
The accommodation doctrine was developed to ameliorate the harsh results of the rule that the mineral estate is the dominant estate and mineral owners have the right to use as much of the surface of the land as is reasonably necessary to explore for and extract minerals, without compensation to the surface owner. The doctrine requires the mineral owner to accommodate existing surface uses where that can be done using established industry practices. The Court’s opinion does not provide any logical reason why the accommodation doctrine should not apply also to severed groundwater rights. Indeed, the City’s use of Coyote’s land to develop its groundwater might be more intrusive than would surface use for development of mineral rights under the land.
The opinion does not address the City’s second argument, that the express language in its deed granting the City extensive rights to surface use should make the accommodation doctrine inapplicable. Many deeds granting or reserving mineral interests contain express language granting the mineral owner the right to use the surface estate for oil and gas exploration and development. I have not seen a case involving the accommodation doctrine in which the mineral owner contended that the express language in its deed granting access rights prevailed over the accommodation doctrine.
Severance of groundwater from the surface estate is not as common in Texas as severances of minerals. But with increased demands for and value of groundwater, such severances will become more common, and other conflicts between the surface owner and the owner of groundwater will likely arise. I expect that the Texas Supreme Court will have to address the applicability of the accommodation doctrine to severed groundwater rights in the near future.
The drought in Texas, along with improved recyclying technology, has driven efforts to increase recycling of water used in hydraulic fracturing of wells. According to one estimate, the fracing of wells in 2011 consumed on the order of 135 billion gallons of water – about 0.3 percent of total U.S. freswater consumption. (Golf courses in the U.S. consume about 0.5 percent of all freswater used in the country.) But if you own land in the Eagle Ford field, those numbers don’t mean much. Water use in some counties is lowering the water table in the Carrizo-Wilcox aquifer, the principal source of frac water for the Eagle Ford, causing some existing wells to dry up. In West Texas, the lack of available groundwater has forced companies to look at recyclying their frac water to extend the useful life of the water they can find for fracing.
Two bills now pending in the Texas legislature – House Bills 3537 and 2992 – would require the Texas Railroad Commission to develp rules to require rthe recycling and reuse of frac water returned from wells. The Commission has recently adopted rules to make it easier for operators to recycle water. And another bill, House Bill 379, would impose a 1-cent-per-barrel fee on wastewater disposed of in commercial injection wells.
Devon Energy, a leader in recycling of frac water in the Barnett Shale, testified to Texas lawmakers that recycling is 50 to 75 percent more expensive than sending frac water to injection wells. There are now about 50,000 injection wells in Texas, and the number is growing rapidly. Recyling is much more common in the Marcellus, where injection wells are not available and water must be hauled long distances for disposal.
The talk about recyling of frac water has raised an interesting legal question: whose water is it?
Groundwater is part of the surface estate in Texas. The owner of the mineral estate has the right to use so much of the surface estate – including groundwater – as is reasonably necessary to explore for and produce the minerals. Typically, an oil and gas lease grants the lessee the right to use groundwater, just as it grants the lessee the right to use the surface of the land, to explore for and develop the oil and gas under the leased property. Unless the lease provides otherwise, the lessee has no obligation to compensate the surface owner for the groundwater used. The operator may drill a water well and use that water for drilling and fracing wells on the lease, without compensation to the surface owner.
If the owner of the mineral estate also owns the surface of the land, the lease may require the lessee to compensate the lessor for use of the surface estate. In such instances in Texas, leases now often require the lessee to pay for groundwater used, at up to 50 cents per barrell or more.
Landowners in Texas also have sometimes contracted to sell their groundwater to operators for use in fracing wells. The operator, after contracting with one surface owner to obtain a groundwater supply, may build a large holding pond to store and use water for fracing of wells located on several leases in the vicinity of the pond, piping the water to its wells.
In those instances where the groundwater is sold to the operator, the operator has title to the water and should be able to recycle and use it as it pleases. But where the operator has taken groundwater under its general right to use the surface estate pursuant to its lease, the issue is less clear. The operator has the right to use the water, but may not acquire title to the water. Until recycling technology came about, the used frac water was just a waste product of the drilling operation that had to be properly disposed of. Once water is recycled, it has an economic value, and the surface owner of the property may claim that the water still belongs to it.
This is just one of the many interesting new legal issues raised by new technology in the oil field.
The University of Texas’ Burear of Economic Geology has issued a draft report updating an earlier report on water use by the oil and gas industry in Texas. Among its conclusions: Movement of shale plays into oil-rich areas of the Eagle Ford and West Texas’s Permian Basin have resulted in increased use of brackish water for frac’ing, improvement in reuse technologies, and lower fresh water consumption, but also more demand on groundwater in regions of South and West Texas.
In the Eagle Ford, although the number of wells completed has increased rapidly, the intensity of water us (gallons per foot of completed interval) has decreased almost in half in four years. The report attributes this decreas in intensity to higher use of “gel” fracs that can carry proppant with much less water. Water use is significantly higher in the down-dip gas window of the play (as high as 1400 gal/ft) vs. the oil window (800 gal/ft). Here are graphs from the draft report about the Eagle Ford’s water use:
Here are some other interesting statistics and projections from the draft report:
Estimated percentages of recycling / reused and brackish water use in principal areas in 2011:
Estimated groundwater / surface water split (does not include recycling / reuse):
Summary of projected water use by mining industry in Texas:
Historical water use in Texas – all categories — 2001-2010:
The Texas Groundwater Protection Committee has a new website that provides a wealth of information and links for those interested in groundwater resources and regulation in Texas. The Committee was created by the Texas Legislature in 1989 to provide coordination among nine state agencies that deal with groundwater: the Texas Water Development Board, the Texas Commission on Environmental Quality, the Texas Railroad Commission, the Department of State Health Services, the Texas Department of Agriculture, the Texas State Soil and Water Conservation Board, the Texas Alliance of Groundwater Districts, Texas A&M AgriLife Research, the Bureau of Economic Geology, and the Texas Department of Licensing and Regulation. The TGPC’s website provides helpful links to maps of Texas aquifers, groundwater management areas and groundwater conservation districts, regulations covering drilling of water wells, groundwater conservation and contamination, injection and disposal wells, and classroom resources. Bookmark this site.
A lot has been written lately about the amount of groundwater being used for hydraulic fracturing in shale plays – particularly in the Eagle Ford Shale, and more recently in the Permian Basin. This raises the question whether — and to what extent — exploration companies’ water wells used in fracing are subject to regulation by groundwater districts in Texas. It turns out that this is not an easy question to answer.
I am indebted to Mary K. Sahs (Carls, McDonald & Dalrymple, LLP), an Austin attorney who specializes in water law and who has written an excellent paper, Frac Water – Regulation of Quantity and Quality, and Reporting by Texas Groundater Conservation Districts, for the State Bar conference “The Changing Face of Water Rights” held on February 23 of this year in San Antonio, for a thorough explanation of this subject. I have borrowed liberally from her work.
Groundwater conservation districts are governed by the Texas Water Code, Chapter 36, and by any special provision in the law that authorized creation of each district. Section 36.117 (b) (2) of the Water Code provides that the following are exempt from regulation: “drilling a water well used solely to supply water for a rig that is actively engaged in drilling or exploration operations for an oil or gas well … located on the same lease or field associated with the drilling rig.” This has been referred to as the exemption for “rig supply wells.” Rig supply wells are still subject to any water well spacing rules imposed by the water district, and the district may require the well to be registered and may require it to be properly equipped and completed.
The Texas Railroad Commission interprets the rig supply well exemption in the Water Code to apply to hydraulic fracturing operations. (“The RRC interprets the phrase “a rig that is actively engaged in drilling or exploration operations for an oil or gas well permitted by the commission” to mean a drilling rig or a workover rig and interprets “exploration operations” to include well completion and workover, including hydraulic fracturing operations.”) But Mary Sahs quotes Ben Sebree, representing the Texas Oil and Gas Association, testifying at a House Natural Resources Committee hearing last year, as saying, with regard to water wells used in hydraulic fracturing: ” … our water wells are not exempt from the rules of the districts. We don’t have to get a permit for them, and I know that sounds kind of odd, but they do have to comply with all the rules of the district, whether it’s spacing, production, whatever, our … water wells have to comply with those rules.” Clearly, there is some ambiguity in the statutory language.
So how do groundwater districts regulate rig supply wells in practice? Mary Sahs went to considerable effort to review the rules of, and interview, several groundwater districts in areas where shale drilling is taking place. Their rules and practices vary considerably. Some districts impose spacing requirements. Some districts require registration and reporting of production. Only one district considered such wells to be fully subject to its regulations.
Districts also have jurisdiction to prevent “waste” of groundwater. Waste can occur where groundwater, stored in earthen pits, leaks into the soil or evaporates; or when the groundwater is transported through aluminum pipes with joints that leak. According to Mary, few districts are addressing this issue.
From Mary’s survey:
The Evergreen Underground Water Conservation District (Frio, Wilson, Atascosa and Karnes Counties, in the heart of the Eagle Ford) believes it does not have authority to regulate spacing. Wells must be registered, but no drilling permit is required. If the well is turned over to the surface owner, the well must then comply with spacing rules to get a permit.
The Gonzales County Underground Water Conservation District (parts of Gonzales and Caldwell Counties) only has authority to regulate water wells producing from the Wilcox, Carrizo, Queen City and Sparta aquifers. Rig supply wells are generally not completed in those aquifers because of their depth. The District has asked operators to report production from their wells. The District encourages operators to use water that is too saline for human consumption, to avoid competition with human uses.
The Upper Trinity Groundwater Conservation District (Montague, Wise, Parker and Hood Counties, in the Barnett Shale) has special legislation allowing it to assess and collect production fees on all groundwater used for oil and gas drilling. Rig supply wells must be registered and production metered and reported, both the volume produced and the volume used at the well head. This allows the district to assess how much water is being lost between the water well and the point of use.
Panola Counter Groundwater Conservation District (Panola County) considers rig supply wells exempt, but asks that they be registered and their production reported. If a landowner sells water for fracing, his well becomes a non-exempt commerical well and must comply with all the district’s rules. Mary reports, from her interview with the General Manager of the district, that “frac water wells create an approximate 1700 foot cone of influence as long as they are filling the frac ponds. Once that use ceases, the water levels recover within 2 months.”
Pineywoods Groundwater Conservation District (Angelina and Nacogdoches Counties) asserts the right to regulate all aspects of rig supply wells. They must be registered and report production monthly, and are considered non-exempt industrial or commerical production wells that must obtain drilling and operating permits and pay a production fee.
Landowners should make themselves familiar with rules of their GCD’s. They should call the district and ask what rules apply to rig supply wells. If the landowner wants to take over a rig supply well it should know what requirements the district will impose, and it should if possible require in its lease that the operator comply with all district rules so that the landowner will be able to use the well. If a landowner wants to use its own well to supply water for hydraulic fracturing it should know the district rules and should, if required, register the well and comply with all reporting requirements.
Groundwater Districts are so far taking a cautious approach to regulation of rig supply wells. In general, they are busy enough trying to establish their desired future conditions and their permitting and production requirements for non-exempt wells. But as they mature, and as drilling in shale plays continues and begins to affect the water levels in aquifers, districts may assert their authority to regulate how the oil and gas industry uses groundwater in their jurisdiction.
The Texas Supreme Court issued its opinion today in Edwards Aquifer Authority v. Day, more than a year after it was argued and some thirteen years after the controversy began. It has been eagerly awaited as the court’s ruling on whether a landowner has a “vested” right in groundwater under his/her land. The Court held that groundwater, like oil and gas, is “an exclusive and private property right … inhering in virtue of [the landowner’s] proprietorship of the land, and of which he may not be deprived without a taking of private property.” The case is being heralded by property rights advocates as a victory for private property rights. The court’s decision, in an opinion by Justice Nathan Hecht, was unanimous.
The opinion is certainly not surprising. It would have been a surprise to most people to learn that they do not have ownership rights in groundwater under their property. But I question whether it is such a victory for property owners and whether it will materially change the current regulatory scheme for groundwater in Texas.
Justice Hecht’s opinion, 49 pages, includes a good summary of the history of groundwater regulation and litigation in Texas over the last 100 years. Remarkably, in all that time the Court had never ruled on the question of whether landowners have a property right in groundwater. The court held that the same rules should apply to groundwater as apply to oil and gas – in both, the landowner has an ownership right in the substance under his/her land, subject to being divested of that ownership by drainage from wells on adjacent lands, and subject to reasonable regulation by the state.
In EAA v. Day, two farmers owned 350 acres south of San Antonio. They applied to the Edwards Aquifer Authority for a permit for their existing water well on the property. Under the rules of the EAA, their right to use water from the well depended on what use they made of the water during the historic period from June 1, 1972 to Mary 31, 1993. The farmers applied for a permit to pump up to 700 acre-feet per year, for irrigation. The EAA granted a permit for only 14 acres, finding that their proof of historic use was not adequate. The farmers then sued, alleging that denial of their permit for 700 acre-feet constituted a taking of their property without compensation. After holding that the farmers did have a “property right” in their groundwater of which they could not be deprived without compensation, the Court remanded the case to the trial court for additional evidence on whether the EAA’s regulations did in fact constitute a taking of property for which compensation is due.
This is where the case gets interesting. The court discusses how the trial court, when it gets the case back, should decide whether the farmers are entitled to compensation. Relying on a US Supreme Court case, Penn Central Transp. Co. v. New York City, the court adopted a test of “reasonableness”: the trial court must consider “the economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations”; and the “‘character of the government action’ — … whether it amounts to a physical invasion or instead merely affects property interests through ‘some public program adjusting the benefits and burdens of economic life to promote the common good.'” Considering these factors, the court must decide whether the economic impact of the regulation on the farmers, considering the promotion of the common good resulting from the regulation of groundwater imposed by the EAA, rises to the level of a “taking” of private property for public use. This in my opinion does not give the trial court much to go on. It is a pretty subjective test and will depend on particular facts. The Supreme Court remanded the case to the trial court to further develop those facts.
So what does this mean for Texas landowners and groundwater districts? Perhaps more litigation. Landowners unhappy with decisions made by their local water district may sue claiming that the district has “taken” their water rights. But, as can be seen by the Day case, such a battle is not to be taken on lightly — in fact, Mr. Day died before the decision was issued — and will be expensive. And there is the possibility that an unsuccessful claimant would have to reimburse the water district’s legal fees. Most water districts have very limited budgets and so will be reluctant to fight landowners’ inverse condemnation suits. As a result, they may be more cautious in how they draft and enforce their regulations.
All in all, the case is an important, but not surprising, milestone in the continuing development of groundwater rights law in Texas.
Texas is in the middle of one of the most severe droughts in recorded history. The population of the state is growing rapidly, and projections are that such growth will continue. Much of Texas is arid semi-desert, with limited rainfall in normal years. Will water become the limiting factor in Texas’ growth?
With water so much on everyone’s minds, I thought it would be a good idea to review some basic facts about water. The following information is from a presentation made by Tom Mason, former General Manager of the Lower Colorado River Authority, who is now a shareholder at my firm, Graves Dougherty Hearon & Moody.
Water on earth:
— 97% is in the oceans
— 3% is fresh water
— 69% of fresh water is ice – glaciers and icecaps
— 30% of fresh water is groundwater
— .3% (three tenths of one percent) of the world’s fresh water is contained in rivers and lakes
Last month, Texas’ water planning agency, the Texas Water Development Board, published Texas’ 2012 Water Plan. This plan was developed through a complex planning process involving 16 regional planning groups. The plan lists 562 recommended water supply projects and strategies to meet the State’s expected water demands for the next 50 years. Estimated costs of those projects: $53 billion.
Most significant aspects of the Texas Water Plan:
Conservation. Twenty-five percent of the “new water” proposed by the plan is by conserving existing supplies. About 2/3 of that conservation is from agriculture, most of the rest municipal. Conservation is possible: San Antonio has reduced per capita water consumption by more than 40% over the last 26 years — in part because a federal court ordered the city to limit withdrawals from the Edwards Aquifer due to environmental concerns. San Antonio engaged in educaton compaigns, new water pricing (the more you use the higher your rate), low flow toilets, repairs of leaky pipes, outdoor water restrictions. Farmers conserve by laser leveling of fields, changes in crops, more efficient irrigation equipment.
New Reservoirs. Texas’ water plan proposes that 17% of “new water” supplies will come from new reservoirs. But there are not many good reservoir sites left in Texas. New dams are very expensive, hard to permit, and few federal dollars are available for such projects. Landowners resist use of eminent domain for reservoirs. Most of the new reservoirs proposed are “off-channel” reservoirs, which will capture heavy flood flows in very large ponds and release them when needed.
Groundwater. 9% of new water supplies are projected to come from development of groundwater resources. About 60% of all water use in Texas now comes from groundwater. Regulation of groundwater development in Texas is handled by groundwater districts. There are now some 96 such districts, and each has its local governing board and sets its own rules. Many districts are underfunded and understaffed. There is now great uncertainty over the powers and limits of groundwater regulation that these districts can impose. With such decentralized management and legal uncertainty, it is difficult to predict how groundwater will meet Texas’ future water supply needs.
Water Reuse. The water plan derives 10% of its “new water” for Texas’ future from reusing treated sewage effluent. Again, the increased use of treated effluent has caused legal uncertainty: who owns water once it has been treated for reuse?
Desalination. 3.5% of “new water” in the Texas Water Plan is from desalination. The cost of water from desalination is now 2 to 7 times more than river water or groundwater.
Water is a big energy user. The State of California uses almost 20% of its total energy production to treat and move water. The City of Austin’s water utility is the single largest customer of the City’s electric utility. Energy production is also one of the largest water users, although much of the water used for electric generation is returned to rivers and streams after use.
Water and energy remain two of the biggest challenges for Texas, our nation and the world.
The Wall Street Journal published a front-page article in its December 6 edition, “Oil’s Growing Thirst for Water,” that highlights issues with the oil and gas industry’s demand for water in the Eagle Ford and other shale plays. The article quotes Darrell Brownlow, a hydrologist and geochemist and a landowner in South Texas about whom I have written previously. The WSJ article highlights the coming conflict between the oil and gas industry’s demand for water and the growing demands on groundwater in Texas.
According to Dr. Brownlow, it makes simple economic sense to use groundwater as a resource for oil and gas exploration: The WSJ says: “Mr. Brownlow … says it takes 407 million gallons to irrigate 640 acres (one square mile) and grow abaout $200,000 worth of corn on the arid land. The same amount of water, he says, could be used to frack enough wells to generate $2.5 billion worth of oil. ‘No water, no frack, no wealth,’ says Mr. Brownlow, who has leased his cattle ranch for oil exploration.”
Most of the Eagle Ford lies above the Carrizo aquifer, which stretches from Webb County on the Rio Grande River up through Fayette County. Dr. Brownlow, a hydrologist, concludes that there is plenty of water in the Carrizo, in most places, to meet the demands for frac water. His estimates:
- There are about 6 million acres in the Eagle Ford play, and a possible 20,000 oil and gas wells (one well per 300 acres).
- An average frac job uses 15 acre-feet of water (4,887,765 gallons, or 115,375.5 42-gallon barrels).
- So, the frac jobs on those 20,000 wells would use about 300,000 acre-feet of water over the life of the play.
- Current withdrawals from the Carrizo Aquifer are about 275,000 acre-feet per year; so the entire demand for frac water from Eagle Ford wells would equal about one year’s withdrawal of water from the aquifer. At a rate of withdrawal of 275,000 acre-feet per year, groundwater management studies estimate that the Carrizo water table will drop an average of 30 to 35 feet by 2060.
Dr. Brownlow says that, if a successful Eagle Ford well makes 300,000 to 400,000 barrels of oil at $80/bbl, the return to the landowner would be $520,000 per acre-foot ($1.60 per gallon). In contrast, the return to a farmer using the same acre-foot of water to irrigate corn, peanuts or coastal hay would be $500 to $1,000 per acre, or about $250 per acre-foot of irrigation water. “The point here is that using groundwater from the Carrizo for hydraulic fracturing in the Eagle Ford Shale has enormous economic potential for landowners, oil production companies and the entire region. Moreover, from a geologic and water planning perspective, additional impact on the aquifer appears minimal,” says Dr. Brownlow.
Below is an analysis of data from the Texas Water Development Board, done by the WSJ:
The oil and gas industry uses only 1.6% of the water consumed in the state. But this use is concentrated in areas where drilling activity is located, often in arid portions of the state, and the use is growing rapidly. As can be seen from the above graph of one water well, if your well is the one affected, it is an important issue. And the water used for fracing in the Eagle Ford is not returned to the ecosystem; it either remains in the formation, or if it returns to the surface, is it reinjected into licensed disposal wells.
In Texas, the oil and gas industry is exempted from regulation by local underground water districts, which have authority to permit and regulate withdrawals from underground aquifers. Those water districts are now in the middle of establishing “desired future conditions” for the aquifers within their jurisdiction and rules to assure that withdrawals are regulated so that those desired future conditions are met. Because those water districts have no authority to regulate wells used for oil and gas exploration, they cannot predict or control the effect of industry uses on their future supplies of water.
The issues raised by industry use of groundwater just go to prove the old Texas saying, “Whiskey’s for drinkin’, water’s for fightin’.”