A recent opinion from the El Paso Court of Appeals, Harrison v. Rosetta Resources, illustrates how important groundwater has become in oil and gas development in the Permian Basin.
Harrison signed a lease on Relinquishment Act land, as agent for the State. The lease provided that the Lessee has the right to use groundwater in its operations, except for waterflood operations. Harrison sued the lessee for tearing up an irrigation ditch and other claims, and the lessee agreed as part of the settlement of those claims to purchase 120,000 barrels of water from Harrison’s water well at fifty cents a barrel. The lessee built a frac pit and bought the required amount of water from Harrison. But then the lessee sold the lease to Rosetta. Rosetta drilled additional wells but, instead of buying the water from Harrison, it piped the water onto the lease from another source. Harrison sued. He claimed that Rosetta had orally agreed to continue the same arrangement he had with the previous operator. He also alleged that there was a local custom, known as the “West Texas Rule,” that the lessee would purchase groundwater from the surface owner. He also alleged negligence and violation of the accommodation doctrine. The trial court granted Rosetta’s motions for summary judgment, and the court of appeals affirmed. Harrison has no right to require Rosetta to purchase his groundwater.
In Texas an oil and gas lease conveys the mineral estate to the lessee for the term of the lease. Because the mineral estate is the “dominant” estate, the mineral owner/lessee has the right to use so much of the surface estate as is reasonably necessary to exploit the mineral estate. The surface estate includes groundwater, so the lessee has the right, unless limited by the lease, to use groundwater in its operations — even to the point of depleting the groundwater aquifer. This is true as to fee lands as well as Relinquishment Act lands.
Water is scarce in the Permian, so landowners have realized the value of groundwater for mineral development and often include provisions restricting the lessee’s rights to use groundwater, or requiring the lessee to buy groundwater from the surface owner. These provisions are enforceable, provided they are in writing. Unfortunately, Harrison failed to include such a provision in his lease or settlement agreement.
A lease can prohibit the lessee from using groundwater. Or a lease can provide that, if the lessee uses the lessor’s groundwater, it must pay for the water. It can also provide that the lessee must purchase the lessor’s groundwater for all operations on the leased premises. If the lease doesn’t require the lessee to use the lessor’s groundwater, the lessee will obtain its water from the cheapest source. But if the lease contains no restrictions on groundwater use by the lessee, the lessee has the right to use groundwater without compensation. Landowners should be aware of these rules when negotiating their lease.