In Cactus Water v. COG Operating, the Supreme Court affirmed that mineral lessee COG, not water rights owner Cactus (who derived it rights from the surface owner), has the right to possession, custody, control, and disposition of constituent water in liquid waste – so-called produced water – from its hydrocarbon production.
Homework is recommended. See these previous posts on the subject. We will pick up from there.
Texas Supreme Court Will Review Produced Water Case | Energy & the Law
Who Owns Produced Water in Texas? | Energy & the Law
Ownership of produced water depended on the scope of the language employed in the granting clauses of COG’s leases, which specifically named only “oil and gas” or “oil, gas, and other hydrocarbons.”
According to the Court, resolution of the ownership question depended not on uncertainty about the lease language but on what set of established principles governs conveyance of an unnamed substance: produced water. Water is not 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 the minerals. A conveyance of water is not effected by implication. But if an unnamed substance is part and parcel of an oil-and-gas conveyance, there is no need to list it separately because the substance would already be included in what was expressly conveyed regardless of whether their presence or value was known at the time of conveyance.
The Court said that there is no dispute that produced water is, and was at the time of the leases, oil-and-gas waste. That the leases did not mention or define “waste” or “produced water,” was not unexpected. The production of liquid waste is an inevitable and unavoidable byproduct of oil-and-gas operations. Granting the right to produce hydrocarbons necessarily encompasses the right to produce and manage the resulting waste.
The Court rejected Cactus’ reliance on groundwater cases, which do not address waste by-products of oil-and-gas production. The Court observed that while produced water contains molecules of water, both from injected fluid and subsurface formations, the solution itself is waste – which is “a horse of an entirely different color.”
Statutes and regulations treat water and produced water differently and distinctly because they are distinct and different. The Court relied on the same statutes and regulations cited by the lower court to conclude that Texas laws define “oil-and-gas waste” in terms that include produced water.
The Court also rejected Cactus’ argument that COG’s possession of the produced water was usufructuary in nature. The right to destroy, dispose of, or consume property is generally inconsistent with a usufructuary right. Instead, the right to the capital value of property, including by means of consumption, waste, or destruction, is inherent in property ownership.
Several of the leases explicitly restrict COG’s water usage. From this Cactus posited that the leases are clear that no water produced from the land could have been included in the conveyance. But those express limitations further emphasized to the Court the distinction between water molecules entrained in hydrocarbon production and the common understanding of water.
Remember freedom of contract
Surface-estate owners can take comfort in the Court’s observation that parties are free to make their own contract with respect to incidentally produced liquid-waste if surface owners intend to retain ownership. Here they did not, and courts cannot employ a backward-looking construction of conveyances that is informed by new technologies that were not within the parties’ contemplation at the time of the conveyances.
In a concurring opinion three justices agreed with the result but identified questions the opinion did not resolve. In particular, the ruling does not address unleased minerals and, having held that the leases at issue include groundwater produced with hydrocarbons, the Court does not go on to address the mineral lessee’s obligations to the landowners with respect to this leased groundwater.
Your musical interlude, change Boston to Austin and there you have it. That one was to easy. How about a dose of optimism.
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