Oil and Gas Lawyer Blog
The Supreme Court has handed down its opinion in Cactus Water Services, LLC v. COG Operating, LLC, a dispute over ownership of produced water. Its holding: COG, the operator, owns the produced water.
Between 2005 and 2014, the Colliers granted leases covering 37,000 acres of land in Reeves County to COG. The leases granted lease of only “oil and gas” or “oil, gas and other hydrocarbons.” COG has drilled 72 horizontal wells, and production from those wells has generated nearly 52 million barrels of produced water. Between December 2018 and March 2021 COG paid nearly $21 million in disposal fees to a third party to dispose of the produced water.
In 2019 and 2020 the Colliers signed “produced water lease agreements” with Cactus Water Services, conveying to Cactus water from oil and gas producing formations and flowback water under the lands covered by the COG leases. Cactus then notified COG of its claim to the produced water, and COG sued for a declaration that it, not Cactus, owns the produced water. The trial court agreed with COG, and the court of appeals affirmed with one dissent. 676 S.W.3d 733 (Tex.App.—El Paso 2023). Cactus obtained review in the Supreme Court.
The Supreme Court’s ruling:
We hold that a deed or lease using typical language to convey oil-and-gas rights, though not expressly addressing produced water, includes that 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 of exception from the mineral conveyance must be express and cannot be implied. The conveyances here include no such reservation or exception.
Potential beneficial uses of produced water have been a hot topic in Texas for some time. In 2021 the Legislature created the Texas Produced Water Consortium to study potential beneficial uses of produced water. The Legislature also directed the Railroad Commission to adopt rules and standards to encourage commercial recycling of produced water. COG’s produced water contains potassium, strontium, barium, iron, and hydrogen sulfide, in addition to chlorides. But to date treating produced water to beneficial reuse is too expensive in relation to disposal by injection; the only common beneficial use is treatment of produced water to use as frac fluid to drill new wells.
COG’s produced water contains potassium, strontium, barium, iron, and hydrogen sulfide, in addition to chlorides. In footnote 3, the Court cautioned that “We express no view regarding ownership of any nonhydrocarbon minerals included in liquid-waste byproduct, as no such substances are in dispute here.”
Lawyers know the long-established law that groundwater is an attribute of the surface estate, and that the mineral owner or mineral lessee, as owner of the dominant estate, has the right to use the groundwater for production of oil and gas unless the parties agree otherwise. The surface owner’s water right extends to both potable and saline groundwater. In Cactus, the Court has created an exception to these rules. If a deed conveys or reserves “oil, gas and other minerals”, that conveyance or reservation now includes the groundwater produced with oil and gas, and ownership of that groundwater passes to the mineral lessee who produces the oil and gas.
The Court’s opinion contains a curious discussion of the character of produced water:
Despite its colloquial appellation, produced water is not water. While produced water contains molecules of water, both from injected fluid and subsurface formations, the solution itself is waste—a horse of an entirely different color. … 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.
And in a footnote:
As several amici point out, many things are composed mostly or largely of water but are not commonly understood to be water. See e.g., Brief of Amicus Curiae Permian Basin Petroleum Association at 8-9 (listing several substances with substantial water components that are not commonly considered to be water: blood plasma (90% water), vodka (60%), whiskey (60%), and concrete (70 to 23%).
By this logic, would municipal wastewater be considered “water”? How about highly saline groundwater containing multiple additional substances and metals?
Justice Busby, joined by Justices Lehrmann and Sullivan, wrote a concurring opinion, emphasizing that the Court’s opinion “is a narrow one.” He emphasizes that the parties by agreement can change the default rule announced by the Court; “Importantly, none of the statutes or regulations the Court identifies prevent the parties from doing so, nor do they purport to divest the landowners of their groundwater ownership by operation of law.” He quotes what he considers to be the essential holding of the Court’s opinion: “the common and ordinary meaning of a grant of hydrocarbons includes the water incidentally produced with those substances at the mineral lessee’s expense, which the lessee is required to properly dispose of free from third-party interference.”
One important issue expressly reserved by the Court is the ownership of commercial quantities of minerals entrained in groundwater. More recently, companies have invested in technology and leased rights to mine lithium from saline water. If a lease grants “oil, gas and other minerals,” presumably the lessee would, for example, have the right to extract lithium from its produced water, subject to its obligation to pay royalties on that lithium. But if a lease grants only “oil, gas and other hydrocarbons,” does the lessee’s ownership of the produced water include the right to the entrained lithium? The Court expressed “no view” on that subject.