On June 27, the Supreme Court of Texas issued its long-awaited ruling in Cactus Water Services, LLC v. COG Operating, LLC addressing the ownership of produced water under an oil and gas conveyance. In Cactus Water, the Court held that where an oil and gas conveyance contract is silent on the rights of produced water (water extracted along with oil and gas), the exclusive rights and obligations to the produced water belong to the mineral interest lessee — not the landowners.
The disposal of produced water is often one of the costliest aspects of drilling operations. The burden and expense of produced water disposal has typically always rested on the lessee. Recent technological advancements have created new uses for the produced water in other industries such as agriculture, manufacturing, or energy production. If treated, produced water can have many potential uses.
The underlying dispute arose when the landowners entered into produced water lease agreements (PWLAs) with Cactus Water Services LLC. The PWLAs purported to convey all rights to, the title to, and interest in the produced water on the oil and gas leases operated by COG Operating LLC. Following the execution of the PWLAs, Cactus Water attempted to enforce its rights over the produced water from COG’s drilling operations on the landowners’ property. Cactus Water and the landowners argued that the oil and gas lease only conveyed the lessee rights to explore for, produce, and keep “oil and gas” or “oil, gas, and other hydrocarbons” — not the produced water.
Under Texas law, ordinary water is not considered to be part of the mineral estate. Unless expressly severed, subsurface water remains part of the surface estate subject to the mineral estate’s implied right to use the surface — including water — as reasonably necessary to produce and remove minerals. Thus, Cactus Water argued that the landowners maintained the full right to convey their interest in the produced water. While COG did not presently have an interest in obtaining value from the produced water, it still objected to Cactus Water’s exercise of control over the produced water because Cactus Water was not equipped to manage and transport the produced water in a manner that would allow for uninterrupted exploration of the oil and gas lease.
The Court agreed with COG and found that produced water is not water that remains part of the surface estate. Rather, as has been understood for many years, produced water is oil and gas waste, which operators bear the burden, right, and duty of possessing, handling, and disposing. The Court emphasized that Texas law has long recognized that the hydrocarbon producer’s possession and control over the disposition of liquid waste is necessarily incidental to, and therefore encompassed in, a conveyance of oil and gas rights. Thus, the conveying parties, which are presumed to contract in reference to the law, understood that the disposal of liquid waste meant the consumption of the capital value, if any, of constituent water.
Key Takeaways:
This decision is consequential as it provides clarity for the ever-changing business of produced water. Oil and gas waste, including produced water, belongs to the lessee unless specifically reserved. The decision provides clarity for midstream and water recycling arrangements in Texas going forward by putting to bed the debate over the nature of produced water. Such a clear legal framework will benefit economic endeavors. In light of new technological developments, we may continue to see more disputes over produced water ownership.
